Four Levels of Rehab - Apartment Buildings

The following excerpt is from IREM’s publication, Practical Apartment Management, Sixth Edition (IREM © 2009):

Apartment rehabs can take many forms. They range from getting your feet wet with a single apartment to a major remodeling that changes both the architecture and the apartment layouts. Most endeavors will be at one of the following four levels outlined below.

One Unit at a Time. The easiest and most common rehab undertaking is a one-at-a-time approach. This involves selecting a single apartment and making a series of changes and improvements to it. These might be modest changes to the layout, a careful redecorating job, new appliances and equipment, bathroom upgrades, or changes in hardware and appointments. Reasonable rent increases are sought and generally accepted for these improvements.

This approach has several important advantages. It extends the useful life of the rental investment. It attracts an audience of more-qualified prospective renters while helping to extend the stay of existing residents. It may take from one to two months to make the changes, and the cost can be equal to two to four months’ rent. Generally, these improvements are paid for with operating funds, eliminating the need for a capital infusion.

The Facelift. Often referred to as a “perfume job,” the facelift is just what its name implies. It refreshes the exterior with landscaping improvements, exterior painting, and resurfacing of some of the paved areas. In addition, there are often modest improvements to some of the common areas, and limited improvements are made to some or all of the apartment units. This work could cost $2,500 to $7,000 per unit.

Frequently, such work is undertaken by an incoming new owner and is accompanied by a general rent increase. The major problem with this approach is that it provides the property with a very short-lived benefit. A year or so later, the luster of the improvements will have faded, often to the point of being unrecognizable.

The Overall Upgrade. Improvements of the overall upgrade are more comprehensive and address more of the property’s components than the first two levels of rehab. A general renewal of the exterior surfaces such as siding, paint, landscaping, paving, and concrete are undertaken. Common spaces leading to the apartments are typically redone. All or most of the apartments get a makeover as well. This includes new paint, carpeting, and appliances. This work requires an enormous outlay of money—$15,000 to $25,000 per unit is not unusual.

The problem with this level of rehab is that you end up with a property that has been totally freshened but is still old. From the street it has not changed much, and the apartment layouts still reflect those of yesteryear. In four or five years, it will be difficult to pinpoint just what was improved. At first, the apartments will command more rent, but that advantage will be neutralized as the newness wears off.

The Major Renewal. The major renewal level of rehab has garnered the interest of some of the best-known apartment specialists, who spend their time searching for well located apartment communities with the right combination of attributes.

Per-unit budgets for a major renewal can be $40,000 or more. This work is anything but mere cosmetics. Rooflines are often raised. The exterior look is completely changed. Architects ignore old apartment boundaries and come up with exciting new layouts that incorporate all of the latest features and appointments.

If you were to go on a one-year sabbatical, when you came back and saw the major renewal rehab, you would certainly believe that someone had torn down the old building and constructed something brand new. The economics of this level of rehab are extremely inviting. Major renewal works best when a property enjoys an ideal location but its apartments have lost their attraction. The winning formula is when the combination of purchase cost and major rehab cost does not exceed the cost of building a brand new structure. When this level of rehab is done correctly, the ROI exceeds that of most other real estate investments.

A major renewal program can—and usually does—involve not renewing leases or relocating residents. Sometimes actual evictions become necessary. It is probable that the current residents will not fit in the picture when the new rents are announced. Some developers prefer to tackle the entire property all at once, while others work in phases. A timetable of a year or more is not uncommon.