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How to Renovate Your Apartment Complex
Our comprehensive guide walks you through five critical questions to ask yourself as you plan your property-wide apartment renovation project.
- Why Renovate Your Multifamily Property?
- Command Higher Rents
- Attracting and Retaining Tenants
- Fixing and Flipping
- Longer-Term Property Maintenance
- When Is the Best Time to Renovate?
- What Are the Risks of Renovating Your Multifamily Property?
- How Do You Finance a Multifamily Renovation?
- HUD 221(d)(4) Loans
- Fannie Mae® Moderate Rehabilitation Loans
- Freddie Mac® Value-Add Loans
- Other Options for Financing Your Renovations
- How Do You Get the Right Contractor for Your Multifamily Renovation?
- The Final Word
- Related Questions
- Get Financing
If you work with multifamily real estate, you are likely keenly aware of the importance of renovations. Regardless of where your building falls on the quality spectrum — from leaky to luxury — capital improvements have the potential to boost a property’s income and your overall return on investment.
But, of course, apartment renovation isn’t necessarily a low-cost endeavor. Find out the basics of improving your multifamily property in this article.
Why Renovate Your Multifamily Property?
There are many reasons to invest in upgrading your apartment community. Maybe you want to update the units to attract new tenants, or you need to make repairs to keep your existing tenants happy. Or, perhaps you’ve acquired an older asset with the intention of fixing and flipping it. Either way, investing in your property can help you increase its value and improve your bottom line.
Command Higher Rents
This one should be pretty clear. Apartment communities that are older and have fewer amenities generally can’t charge as high of rents as newer multifamily assets with top-of-line community features. Unless they have a really killer location, maybe. The point is, by offering quality to your residents, you will generally be able to charge more.
Attracting and Retaining Tenants
Let’s say you own a slightly older Class A apartment building in a neighborhood with a fair bit of construction activity going on. With new luxury units delivering, will your property be able to compete in its current state? Maybe it can. But either way, you risk increasing vacancy rates — and associated vacancy costs — if it can’t.
What do I mean by slightly older, though? Before your property gets offended, I don’t mean old old — even a few years without significant improvements can be a detractor for renters seeking the best living experience — but, generally, if your competition is offering amenities, apartment features, and services you currently aren’t, it may be time to invest in some upgrades. Even adding something like a community garden or replacing fitness center equipment can have appreciable benefits.
And this doesn’t just apply to high-end communities, either. A Class C community has potentially even more upside to be gained by adding some new amenities or replacing outdated systems. The best part about all this is that it doesn’t always need to be cost prohibitive. Even something as small as adding a community garden can be a huge defining characteristic to make your apartment complex shine.
Fixing and Flipping
This one practically goes without saying, but if you’ve acquired a multifamily asset to turn it around and sell it for a higher value, you’ll need to invest some time, effort, and money — not to mention blood, sweat, and tears.
If you’re buying a Class D apartment building and just replacing the curtains, don’t expect massive returns. Check out your competition and what they’re offering — and I don’t just mean those with similar property values. If you’re looking to turn a really dilapidated property around, major renovations could shift it far up the quality curve. Capital improvements at this level could include merging small units to offer larger floor plans, replacing windows, adding energy-efficient appliances, or building garage parking.
Longer-Term Property Maintenance
As I’m sure you know, proactive property maintenance is far better — and far less costly — than reactive maintenance. While it may be expensive to proactively replace some older galvanized pipes in your community with copper or PEX plumbing, it will assuredly be more expensive when you have a major leak and need to bring out a plumber to handle the job at 2 a.m. on Sunday.
While the longer-term maintenance aspect may not be the focus of your renovation work, it can often be cheaper to do it alongside other improvements. Repurposing a community lounge into a gym? You’ll be in the floor and walls — you might as well take care of things you’ll have to eventually replace or improve anyway.
When Is the Best Time to Renovate?
The best time to renovate your multifamily property depends on a number of factors, including your budget, the condition of your property, and the rental market in your area. If you have the budget for it, it’s usually best to renovate when the rental market is strong. That way, you can realize gains in the short term through higher rents and improved attraction or retention.
Of course, just because your local rental market may not be strong might not be a good enough reason to defer property upgrades on its own. It all depends on the condition of the property, in-place versus market rents, and other important indicators like vacancy. Think of it this way: If your community has a substandard vacancy, even during a rough time for the market, this could be a great opportunity to get work done — from minor improvements to a gut rehab — in those unoccupied units or across the entire property. Do that when you’re full, and you could take a more significant hit in terms of lost rental revenues.
What Are the Risks of Renovating Your Multifamily Property?
There are a few risks to consider before renovating your multifamily property. As you’ve no doubt heard, construction costs have risen dramatically over the past few years. While most people think of ground-up development projects being impacted, renovation work, too, has skyrocketed in cost. Make sure you do your research and plan ahead with a strong budget before beginning apartment renovations to avoid any nasty surprises.
Tied to construction costs, construction delays are also an unfortunate fact of life. Due to supply chain issues, some cannot be avoided — so it may be best to take a very conservative approach in terms of your project timeline. Don’t assume you will have rents in place the month after your capital improvements are scheduled to wrap up.
Finally, your renovation work may simply not be enough to get the investment outcome you’re looking for. You may invest a lot of capital to add the highest-end luxury amenities to a property built in the 1980s — but if potential renters are looking for a newer building, you may not see much of an uptick in occupancy or rental revenue.
How Do You Finance a Multifamily Renovation?
There are a lot of different ways to finance the renovation of an apartment building. How you finance your improvements depends greatly on your savings and the expected costs of renovation.
If you’re doing some light improvement work — say, fixing some holes in the roof and doing some new landscaping work — you may not need to tap into additional financing.
But what if you’re doing more? If you’re upgrading your building’s HVAC systems or replacing windows, flooring, and appliances across a property, this can get expensive fast. In these cases, it may be best to take out a loan or look into a line of credit to support your investment strategy.
So what kind of loan works best for renovating apartments?
HUD 221(d)(4) Loans
If you’re doing a substantial rehabilitation of a property, the HUD 221(d)(4) loan could be the best option. While this type of loan may take some time to close, HUD loans have some of the best financing terms out there. Think 40-year fully amortizing terms with low, fixed interest rates — and leverage up to 85% for market-rate properties (and higher for affordable communities). The main eligibility restriction is that the cost of the rehab must be more than 15% of the property’s replacement cost. So, this won’t cover just giving your building a fresh coat of paint.
Fannie Mae® Moderate Rehabilitation Loans
Even if you’re not doing a full rehab, there are still plenty of attractive options. Take Fannie Mae’s Moderate Rehabilitation Loan, for example. This type of financing is available if you’re planning $10,000 per unit in planned upgrades. Terms range from five to 30 years, and interest rates can be fixed or variable. And these loans are available at a loan-to-value ratio of up to 80% of the property’s stabilized value or purchase price (if it’s been sold in the last 12 months).
Freddie Mac® Value-Add Loans
Freddie Mac also offers a couple of different programs for multifamily renovations. One, the aptly named Freddie Mac Value-Add Loan, provides financing at an LTV of up to 85% with a three-year term. This financing vehicle has a floating interest rate, but like most other agency loans it’s non-recourse. This loan type is not available for student or senior housing or manufactured housing communities, however.
Other Options for Financing Your Renovations
There are myriad other financing choices for a renovation — and if it’s only relatively minor work, a simple multifamily refinance on an asset’s appreciated value may provide sufficient capital for your needs. Bank, credit union, life company, or CMBS loans could be ideal here.
How Do You Get the Right Contractor for Your Multifamily Renovation?
Choosing the right contractor for your multifamily renovation is crucial to the success of the project. When you’re looking for a contractor, be sure to get bids from several companies, check references, and read reviews. Also, make sure you have a clear contract that outlines the scope of work and the payment schedule.
Here are a few tips to help you choose the right contractor for your multifamily renovation:
Don’t rely on just your personal network. Review multiple bids.
Ensure they have experience with multifamily renovations.
Ask for — and check! — references.
Have a detailed contract to specify the scope and type of work.
What are the best ways to finance a renovation of an apartment complex?
The best ways to finance a renovation of an apartment complex depend on the expected costs of the renovation and your savings. If you’re doing some light improvement work, you may not need to tap into additional financing. However, if you’re doing more extensive work, such as upgrading HVAC systems or replacing windows, flooring, and appliances, it may be best to take out a loan or look into a line of credit to support your investment strategy. Other options for financing your renovations include a simple multifamily refinance on an asset’s appreciated value, or a bank, credit union, life company, or CMBS loan.
What are the most important considerations when renovating an apartment complex?
When renovating an apartment complex, the most important considerations are construction costs, construction delays, and the potential return on investment. Construction costs have risen dramatically in recent years, so it is important to plan ahead with a strong budget to avoid any surprises. Construction delays can also be an issue, so it is best to take a conservative approach in terms of the project timeline. Finally, it is important to consider the potential return on investment, as investing in high-end luxury amenities may not be enough to get the desired outcome if potential renters are looking for a newer building.
If you need help financing your renovation project, there are many options available regardless of the size of the project. Multifamily.loans can match you with the best loan for your needs.
What are the benefits of renovating an apartment complex?
The benefits of renovating an apartment complex include increasing its value, improving the bottom line, and attracting and retaining tenants. Upgrading amenities, replacing outdated systems, and adding features like a community garden can help make your property stand out from the competition. Additionally, investing in renovations can help you if you are looking to fix and flip an older asset.
What are the risks associated with renovating an apartment complex?
There are a few risks to consider before renovating your multifamily property. As you’ve no doubt heard, construction costs have risen dramatically over the past few years. While most people think of ground-up development projects being impacted, renovation work, too, has skyrocketed in cost. Make sure you do your research and plan ahead with a strong budget before beginning apartment renovations to avoid any nasty surprises.
Tied to construction costs, construction delays are also an unfortunate fact of life. Due to supply chain issues, some cannot be avoided — so it may be best to take a very conservative approach in terms of your project timeline. Don’t assume you will have rents in place the month after your capital improvements are scheduled to wrap up.
Finally, your renovation work may simply not be enough to get the investment outcome you’re looking for. You may invest a lot of capital to add the highest-end luxury amenities to a property built in the 1980s — but if potential renters are looking for a newer building, you may not see much of an uptick in occupancy or rental revenue.
What are the most common mistakes made when renovating an apartment complex?
The most common mistakes made when renovating an apartment complex are not doing enough research and planning ahead with a strong budget, not taking a conservative approach to the project timeline, and investing in the wrong amenities.
Construction costs have risen dramatically over the past few years, so it is important to do research and plan ahead with a strong budget before beginning apartment renovations to avoid any nasty surprises. It is also important to take a very conservative approach in terms of your project timeline, as construction delays are an unfortunate fact of life. Finally, investing in the wrong amenities can lead to a lack of occupancy or rental revenue.
If you choose to renovate, there are many financing options available — regardless of the size of your project. We can match you with the best loan for your needs, whether you’re gut rehabbing a seven-unit Class C building or adding amenities to a 60-unit luxury property. Fill in your details here and we’ll be in touch with a free quote.
What are the best strategies for managing a renovation project for an apartment complex?
The best strategies for managing a renovation project for an apartment complex depend on the size of the project, the condition of the property, and the rental market in the area. It's usually best to renovate when the rental market is strong, so you can realize gains in the short term through higher rents and improved attraction or retention. If the property has a substandard vacancy, even during a rough time for the market, this could be a great opportunity to get work done in those unoccupied units or across the entire property.
Before beginning a renovation project, it's important to have a plan and a comprehensive-but-flexible budget in place. Care should also be taken in selecting a contractor. Additionally, there are many financing options available for renovation projects, regardless of the size of the project.
If you need help wading through the financing options, we can match you with the best loan for your needs. Fill in your details here and we’ll be in touch with a free quote.
- Why Renovate Your Multifamily Property?
- Command Higher Rents
- Attracting and Retaining Tenants
- Fixing and Flipping
- Longer-Term Property Maintenance
- When Is the Best Time to Renovate?
- What Are the Risks of Renovating Your Multifamily Property?
- How Do You Finance a Multifamily Renovation?
- HUD 221(d)(4) Loans
- Fannie Mae® Moderate Rehabilitation Loans
- Freddie Mac® Value-Add Loans
- Other Options for Financing Your Renovations
- How Do You Get the Right Contractor for Your Multifamily Renovation?
- The Final Word
- Related Questions
- Get Financing
A little research goes a long way toward bringing the right people to do the work needed on your property.
The Final Word
Not all properties are in need of renovation, but a well-planned capital improvement project can bring a dated asset back to life — or ensure a community’s continued success and competitiveness. Just make sure you’re aware of the risks. Once you’ve got a plan and a comprehensive-but-flexible budget put together, make sure to take care in selecting a contractor.
If you choose to renovate, there are many financing options available — regardless of the size of your project. Need help wading through the choices? We can match you with the best loan for your needs, whether you’re gut rehabbing a seven-unit Class C building or adding amenities to a 60-unit luxury property. Fill in your details below and we’ll be in touch with a free quote.