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Look Beyond Construction to Amplify ROI

October 2021

Find the value-add in options other than physical renovations like rebranding, operational upgrades or tech upgrades.

When Los Angeles-based JRK Property Holding buys a new apartment community, President and Chief Operating Officer Bobby Lee doesn’t necessarily just see another asset in his portfolio.

“I look at it as we’re buying businesses,” Lee says. “They have real estate attached to them, but we’re buying businesses. And when we find businesses that we think we can operate better or put capital into to make them look better, we can drive better performance in the long run.”

The usual assumption with value-add buys is that they’ll require significant renovations, but that isn’t always the case. For example, when JRK takes over new properties, many of them don’t need construction upgrades. “Everybody focuses on the physical side of value-add, but the operational side is a big part of value-add,” Lee says.

Through efforts like rebranding and operations upgrades, JRK can find ways to harvest value from underperforming properties. “I get as much or more gains from doing things that have nothing to do with changing anything physically,” Lee says.

The list of non-construction upgrades an apartment operator can make when taking over a property is long. Some enhancements and additions can boost revenue, while others can save money and make operations more efficient. Many of these enhancements accomplish both goals while increasing resident satisfaction.

But not everything is a winner. 

Branding upgrades

When Tampa, Fla.-based American Landmark buys an older property, CEO Joe Lubeck says the company takes a multi-pronged approach. It makes physical improvements when they’re necessary. But it also renames all of its properties

“We rebrand them,” Lubeck says. “We redo all the landscaping and all the colors.”

Lubeck isn’t alone. Others see the value in a fresh start. “The units or where they live is number one [most important],” Lee says. “The curb appeal of the property—paint, landscaping and signage—is also up there.”

If the property previously has a poor reputation, a name change may also be necessary. “If I have a property that is the worst property in the neighborhood or it went downhill over a few years, a common thing that we’ll do is focus money on construction and the curb appeal,” Lee says. “But we’ll also consider a name change. So, you go on all of the electronic listings, and you have a new name.”

With those changes on the listing services, a once-troubled property can get a brand-new reputation and lease on life. “Nobody even knows that the property used to have a bad reputation,” Lee says.

Operational upgrades

Not every community needs a structural or branding upgrade. But that doesn’t mean it is operating at peak efficiency. “You have to look at not only the top line but also the expense line,” Lubeck says. “You also look at expense control and how to monitor your expenses properly.”

In many cases, cutting costs can help squeeze net operating income (NOI) from these communities. When JRK takes over a property, every expense is analyzed, including things that are being outsourced.

“Whether it’s the pool service, the painting of the interiors of the units or the hallway cleaning, we see a mixture of things that people like to outsource,” Lee says.

There are many other little things apartment operators can do to save money and make a property run more efficiently after an acquisition, including addressing trash. “We’ve installed these very cool machines that can eat up bulk trash, and you can consolidate the number of trash bins you have,” Lee says. “So instead of having 15 dumpsters on a property, we end up at 10.”

These machines’ capabilities allow other efficiencies for JRK. “We can do [trash] pickup less frequently because we have these massive compactors that eat up the trash better,” Lee says. “And we can save thousands of dollars a year of trash expenses at that property.”

Efficiencies can also be found other ways. While institutional-level apartment operators adopted revenue management long ago, absorption hasn’t been as widespread across smaller ownership groups. For Los Angeles-based DB Capital Management, that provides an opportunity when it buys a new property.

“We have seen the effectiveness of [revenue management] products take off in recent years,” says Brennen Degner, Co-Founder and CEO of DB Capital Management. “More and more groups have started to rely on revenue management software in their operations.”

As more operators adopt these revenue management systems, the more accurate the information becomes, according to Degner. “When evaluating comps, we now find it important to note whether or not the comp is on a revenue management system,” he says. “If a sampling of your comps are on a system, it is imperative your subject property be put on one, too. Otherwise, you will always be a few steps behind the competition.”

Capturing lost revenue

Corralling expenses isn’t the only way that apartment firms squeeze value from new acquisitions. Finding new ways to generate revenue also can pay off.

Lee says “non-rental revenue” represents 10% to 20% of JRK’s revenue from its properties. “There are just lots of cool things [you can do],” Lee says. “These properties are living, breathing businesses. So when you pull up your sleeve, you just find a lot of ways to optimize that operating income at these properties.”

For instance, JRK has found success with assigned parking. A property may provide one or two spots with a unit. Then, if a resident wants an additional space, they can reserve one for $100 or $150. “You generate a lot of income that way,” Lee says.

Reserved parking in carports and detached garages can provide even more revenue. If that parking space is attached to a unit, residents will often pay higher rent. “We get 100% penetration on those garages,” Lee says.

DB Capital Management also sees different opportunities to drive ancillary income at new acquisitions. For example, in Salt Lake City, the company was able to pass through a portion of the annual property tax payments to residents. “We also pass-through monthly pest control costs,” Degner says. “We are continually focused on adding value through passing through as many costs as the market will support.”

DB Capital Management has been able to implement valet trash pickup suppliers into properties and make an attractive spread on the cost versus bill-back, according to Degner. “It is very important you choose a reliable vendor or this amenity can become a nuisance quickly, especially at properties with interior loaded corridors,” he says.

Stronger internet speeds

It is now common for properties to sell internet to residents, but some communities that DB acquires still don’t provide this option.

“The ease of the internet being move-in ready and the resident not having to deal with setting up with a service provider is an added positive from a marketing perspective,” Degner says. “The more we have seen cable and satellite TV become less necessary with streaming, the easier the implementation of this strategy has become.”

American Landmark and Bell Partners also prioritize Wi-Fi in apartment upgrades. “A lot of our properties and a lot of the properties we buy are under marketing agreements with cable providers,” says Cindy Clare, Chief Operating Officer at Bell Partners. “As we come out of those, we look at a managed Wi-Fi solution. Some of that demand is being driven by residents.”

Clare says Wi-Fi is a win-win for both Bell and its residents. The company saves money by having strong Wi-Fi in its amenity areas, while residents get a viable option to cut the cord.

“Residents have the option of just getting Wi-Fi in their unit and not having to get cable,” Clare says. “A lot of younger residents don’t necessarily want cable. They do everything through streaming services, and what they’re really focused on is the speed of their Wi-Fi.”

Smart-Home Questions

Internet isn’t the only technological upgrade to boost performance at a property upon acquisition. Lubeck says smart-home technology has improved efficiency. “It has improved cost of operations and it’s improved resident services—all of which has definitely dropped more cash flow to the bottom line, in my opinion,” he says.

Whether looking at energy-efficient appliances or smart thermostats, Bell Partners also takes saving money into account when upgrading apartments.

“We have not done it yet, but we are looking at smart-home concepts,” Clare says. “Smart locks are something we have definitely implemented.”

Some products are both welcomed by residents and help operators save money. “We liked the smart locks because our residents like them first and foremost,” Clare says. “But secondly, it is more efficient for our maintenance guys because we can hand them a key fob and program the units they’re going to. So, there are some benefits to that.”

While some operators have found smart-home technologies helpful, Lee says it is still challenging to get the necessary NOI for these systems. For example, at JRK’s highest-end properties, the company tried smart lighting, alarms, music and locks to allow housekeepers into an apartment.

“We don’t charge extra for it,” Lee says. “We just tried to raise our rent and see what happens. And with every single one, I’d be charging the same rent as before within a few weeks. And then we would just stop upgrading the rest of the units.”

As Lee’s story shows, apartment operators shouldn’t make investments for the sake of just upgrading a new acquisition. Ultimately, when buying a new property, it’s important to know both the residents and the market before making significant investments. That, more than flashy technology or new kitchens and baths, is what makes value-add plays successful.

Les Shaver is a freelance writer.