Why It Could Be A Mistake To Renovate And Raise Rents!

Why it could be a mistake to renovate and raise rents!
What’s up everyone, Chris Kennedy here. And in this video, I’m going to show you why it’s not always the smart investment to put your money into a building that you own and crank up the rents. And this video comes from, or the ideas in this video come from conversation that I had with an investor client of ours last week, someone that we manage a good amount of property for talking about specifically a few buildings, all right beside each other in the downtown Fort Lauderdale area. And we were talking about perhaps putting money into those buildings to renovate the apartments. And the reason we’re doing that is that the buildings are in really nice condition, exterior, nice curb appeal, but they are older buildings and the units are dated. They were probably last renovated maybe 15, 20 years ago, but they function they’re clean, they operate okay.

But obviously because of the level of updating, the rents are significantly lower than what the market bears right now. So investment in those units, renovating them could take rents up by 300 to $400 per month. Now the interesting thing is the owner of this property is a very sharp guy. He’s been doing this a long time and knows a lot of things about the market right here and gave me a good thought. He said, “Chris, the reason I don’t want to do this is I know that right now in the pipeline, there are thousands and thousands of apartments coming online, downtown Fort Lauderdale, brand new class A apartments. That is a big supply. Now the demand right now for rentals is huge and there’s the opportunity or the possibility that that new supply of apartments is going to get rented.

And we’re not going to have an issue, but there is also a very real risk that once all that new supply comes online and is available, rents start to go down. And what if these developers who put up these brand new buildings cannot get the rents that they were anticipating because there’s not enough demand? Well, guess what happens, then they’re going to start offering concessions. They’re going to start reducing rents and while right now on paper these two bedroom apartments might be rented for 2400, 2500, 2800 a month. If the plan goes right, they could very easily be taking those rents way down 2000 a month. And now my client who owns this older building has invested a bunch of money in upgrading his two bedroom apartments, he might be able to get today 1800 a month for those. Now, all of a sudden, he’s trying to get 1800 a month in his older buildings with fewer amenities, but nice apartments.

And he’s competing with the brand new product that has a gym onsite pool rooftop deck, wifi business center, all that stuff, really nice amenities. And it’s only a couple of hundred dollars a month difference in pricing. So if you’re a renter in that market, you’re probably very likely to say, “Hey, I’ll take the one with nicer amenities instead of saving 200 a month.” So what this guy wanted to do is avoid direct competition with new products. And he can do that because he happens to own these buildings free and clear. He’s making great cash on cash return, the way he bought them. And he has the luxury of being able to do that. That’s not the case for everyone, but it’s just a smart way of thinking about things. Instead, he’s saying, instead of putting my money into these buildings, I’m going to keep the buildings the way they are, keep them well-maintained, offer nice products that is very affordable, like two bedroom apartments in the 1350 to 1450 range. And the new construction will never ever be competing with him.

So he’s got a monopoly on that sort of market because there’s very little of that product near the downtown Fort Lauderdale area. So that’s a way of creating your unique product in the market in kind of the opposite way that we always think about creating a unique product that’s nicer, better, more expensive. Instead he’s saying, keep it at a lower price, it’s competing on price. Lower price, provide a good apartment, but at a much lower rate. So this is also just as a side note, why I really like the affordable apartment market right now. I like workforce housing. That’s what we’re looking at a lot these days, tougher to come by, but it’s very hard for developers to actually develop this stuff at a lower rent rate. So if you can get your hands on it, it’s in my opinion, a great investment.

All right guys, I hope that provided some value to you. If you liked this, go ahead and subscribe to our channel. You’ll get updated when we post more videos like this. In the meantime, stay tuned and I’ll talk to you soon.
Christopher Kennedy

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