In this video, Christopher Kennedy, our principal broker and managing partner shows that sometimes it’s much better to reinvest in property that you already own, rather than going out and looking for a new property to purchase.
“So, a lot of times what happens folks, is that we get kind of caught up as we’re growing our real estate portfolios as investors, we get caught up in always looking for the next deal. And what can happen is sometimes you’ve owned a property for a good amount of time, maybe two, three, five years, and you don’t really give much consideration to if you can do anything with that particular property versus going out and purchasing a new property. Because we’re, a lot of times, always in growth mode. But this video, I’m going to explain to you something that I call return on capital and show you how I look at investing money in properties that I already own in comparison to looking at new properties.
So let’s just take, for example … Let’s say I’ve owned a 10 unit apartment building, and I’ve owned it for say five years, and maybe the rents are a little on the low side compared to the rest of the market. And I look at some of the market comps. I look at the comparable rentals in the area, similar sized units. And I see that with some investment in the individual apartments, I can take rents from maybe 1200 a month up to, I don’t know, 1600 a month.
Maybe there are two bedroom apartments, pretty dated. And if we go ahead and spend some money there, renovating them, we can bump the rents by $400 per month.
So let’s keep the math simple as I always like to. If I can take rents up $400 per month across 10 apartments, well 400 a month times 12 months will give me 4,800 per year per apartment, times 10 would give me $48,000 per year in additional rent. Okay, that’s in increased rents. Okay. 48,000 per year. Now let’s take, for example, the unit renovation, and let’s say it costs me, to keep numbers simple, let’s say it costs me $10,000 per apartment in order to renovate them to a level where I can get that additional $400 per month. Now you might be saying that 400 a month, that’s a huge rent bump, but this happens all the time in our business. So $10,000 investment, maybe we’re putting in a nice new kitchen, upgrading the bathroom, repainting, putting in baseboards, upgrading light fixtures, et cetera. We can probably make that happen for somewhere in the neighborhood of $10,000, depending on the unit size. Could go a little higher than that, but let’s keep the math simple. So 10,000 per unit, times 10, meaning an investment of 100,000. Right?
Now, you probably see where this is going, but a $48,000 annual return on a $100,000 investment, that’s a 48% percent return turn on your money. And remember, that additional 400 per unit per month, that is ongoing every single year. So this continues to work at that 48% per year when you invest that $100,000. Now, you would be hard pressed to find any deal these days that you can purchase and we’ll make you 48% on a new deal. So just to give you an example, if I took that same $100,000 investment and I purchased a single family home, and say that single family home rented for approximately 1000 per month, that gives me 12,000 per year, total rent. If I didn’t get any debt on that property, I owned it free and clear, I would probably have to pay about 50% of that rent in expenses. So we’re going to keep it $6,000. So your return on that $100,000 if you buy the house, is just $6,000 per year. Versus if you take that same 100,000 and reinvest in your apartment building.
Now, even if your rent increase is not the 400 per month, even a $200 per month rent increase cuts that in half, you’re still making a $24,000 return on your $100,000 investment. That is what I call return on capital. So this is capital that I’m investing into a property that I own, how much return am I going to get on that capital? So in this case, it’s a 48% return on capital.
So that just illustrates this point. So sometimes folks, it’s better to look at some of the properties that you already own and think, “Okay, what could I do here? Are there things I can do? Have I not been keeping up with the property? Have I been overlooking some very easy value add opportunities at this property?” Something that we’ve done at a number of apartment buildings that we own, smaller apartment buildings, is simply enclose the back yard area behind each individual apartment using a typical six foot wood fence. That’s a very cheap upgrade to do, but it immediately adds value because people love to be able to go out the back door and have a private place where they can have a drink in the evening, hang out with friends, whatever. So people will pay more rent for that and they will stay longer in those apartments.
So little things like that you can look for and analyze those as, “Okay, what’s my return on capital? How much do I need to invest? And what increased rent amount is that going to get me on an annual basis?” Hope this was helpful. Stay tuned for the next one.”