HOW DO YOU CREATE THAT SECOND PHASE OF VALUE?
HOW DO YOU CREATE THAT SECOND PHASE OF VALUE?
Research has shown that the following steps will set your asset apart from the competition:
- Complete the required deferred maintenance.
- Renovate units to compete effectively in the market.
When you plan on holding an investment for three to five years, we recommend you complete the first two items above, as well as:
- Renovate a subset of the upgraded units with a second phase of upgrades. Once completed, you would be testing the market and providing proof of concept via an additional rent bump from the enhancements.
Where there is a 3 – 5 year hold period on the investment, and the renovation is expected to take one year or more, we recommend focusing on creating additional value in year three.
Typically there is a 2% natural increase in rents annually, due to inflation. Why not plan for a second phase of enhancements in year 3, to increase cash flow AND
- You will hopefully see an increase in cash flow derived from the rent bump.
- You will be in a position to NOT leave value on the table.
- The asset will be easier to sell. You’ve done the majority of the “hard lift” and a sample of the “light lift” to detail the proof of concept. The new owner will be able to take over from there and complete the light lift throughout the remainder of the community.
THE NUMBERS
If a second phase of enhancements could provide a $200 per door increase in rent, equaling $48,000 in value (at a 5 cap), wouldn’t you be interested? You would essentially be capturing value by increasing cash flow immediately as well as a percentage of the next buyer’s potential upside.
There is a range to the cost for these second phase enhancements, typically an additional 20% of the first phase of renovations. If the cost of the first phase was $12,500 per door, the second phase would be $2,500. Divide that by the $48,000 value above to come to a 52% return on investment!
SECOND PHASE ENHANCEMENT IDEAS
Countertops – If your current countertops are laminate, upgrade to granite. If they are granite, upgrade to quartz.
Backsplash – If your kitchen does not already have a backsplash, consider adding one.
Appliances – If your current appliances are black or white, replace them with stainless steel. If they are stainless steel, consider upgrading them to matte black.
Hardware – Swap out your current hardware – door knobs, handles, pulls – with a modern, upgraded version.
Cabinets – Swap out the door fronts for a more luxurious style. If you currently have white shaker-style cabinets, consider swapping them out for European-style doors or an upgraded color palette.
Interior doors – Replace old interior doors for new. Opt for 1 panel doors in lieu of the traditional 6 panel style.
Faucets – Upgrade the kitchen and bathroom faucets to an on-trend patina.
Shower – Upgrade the shower enclosure where applicable, add on-trend tile surround or trim kit to match upgraded hardware in the kitchen.
PARTNERING WITH ADIVO CONSTRUCTION
When a prospective project is introduced to us, we look at more than what is requested on the original scope of work. We tailor phase one (the heaviest part) renovations to a possible lighter, second phase of renovations, keeping an eye on what can be accomplished above and beyond. The second phase of renovations are simply enhancements to what has already been completed during phase one.
One of the many things we take into consideration when formulating a possible second phase of renovations in year three is the condition of the cabinets. Either ensuring that the current cabinet boxes are in great condition or replacing them with new boxes, we will set the asset owner up with the ability to simply upgrade the cabinet doors.
Do you have any assets in your portfolio that could use a second phase of renovations to increase value? Contact us today at 954-570-0300 for more information!
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