October 10, 2014 – LIVE from Denver’s Cherry Creek neighborhood, you are listening to the Kyle Malnati Radio Show! I am your host, Kyle Malnati, and I’m excited to talk to you about real estate today!
Today’s show is going to be about renovation. My business partner, Greg, and I wrote an article a few weeks back, that is on our blog, called “Renovation Makes Sense… It Makes Dollars and Cents!” (http://kmalnati.wordpress.com/2014/09/23/renovation-makes-sense-dollars-and-cents/)
I am excited to share with you that topic and show how in mind of the investor how you can renovation an apartment building and what the difference can be in a sale between a renovated and an unrenovated product. Before we dive into that topic, I would like to say thanks to my sponsor Dustin Thome of Keller-Lowry Insurance. Dustin is a partner and owner of Keller-Lowry, and Dustin has become a good friend of mine as we have worked on a lot of different insurance policies for the purpose of investors that own apartment buildings as they are getting prepared to close on the purchase of their apartment building, Dustin has helped with their insurance policy. Not all insurance companies will insure apartment buildings, so it is important to find a broker like Dustin that can go to the open market and find the best insurer for your apartment building. Dustin works with targeted insurance carriers that have specialty policies designed for property owners. You can contact Dustin Thome locally at: 303-756-9909 or toll-free at 1-800-753-9909. Dustin, thank you for your sponsorship! I’m broadcasting from Stewart Title in the Cherry Creek neighborhood of Denver. I would also like to thank Laurel Rossi and the team at Stewart Title for all of their help during our closings and for providing us this space to broadcast our radio show.
Diving into the topic of our show… we’re going to talk about renovation! Renovation, it does make sense; it actually makes “Dollars and Cents.” Its really rare for us, as a brokerage team, to have the ability to sell two apartment buildings right next to each other that were built in the same year and that look the same from the outside. There is a lot to be learned when you sell side-by-side properties especially when one building commands a $500,000 premium over the other building. During my career, I’ve sold dozens of these 12-unit center hallway apartment buildings in Denver, but I have never really sold neighboring “sister” buildings side-by-side in the same year.
Here are some quick characteristics of the two buildings:
– both built in 1961
– exact same unit mix: 11-1Br and 1-Studio
– identical apartment floorplans
– 4 off-street parking spaces
The buildings are located on the same street, 13th and Monroe; one is located at 1335 Monroe and the other is located at 1345 Monroe. When we sold 1335 Monroe in April of this year, it was a very neat and clean apartment building, and it was in pretty decent condition. It was an average building for Congress Park, but due to the longevity of the ownership, rents had fallen a little bit below what we would see as normal in the marketplace. We were able to sell the building for $1,400,000, which equates to $116,667/unit. The building next door, directly to the North, is located at 1345 Monroe. 1345 Monroe was completely renovated in 2012. Interestingly enough, the man that owned 1345 Monroe and renovated it, bought his building from the man next door who owns 1335 Monroe. At one point, one man owned both the side-by-side buildings on Monroe.
The apartments at 1345 Monroe were renovated with new cabinets, appliances, tile, and flooring. Also, the building itself received several new upgrades: windows, boiler system, and electrical service; all of which helped provide efficiency when operating the apartment building. The biggest difference between the two buildings is the monthly rent each building receives. Monthly rents at 1345 Monroe, the recently renovated building, exceeded $1,000/month, where as 1335 Monroe had rents largely in the $700/month range. Because of the exceptional condition and the enhanced rental income that I mentioned before, we sold 1345 Monroe in August of the same year, for nearly $500,000 more than 1335 Monroe! The closing price for 1345 Monroe was $1,895,000, which equates to $158,000/unit. The moral of the story is renovation does makes sense, it makes dollars and cents!
Some suggestions that I received from the gentleman that owned and renovated 1345 Monroe were if you are going to do a renovation, empty all of the units in the apartment building and do the renovation all at once. This sounds like a novel concept, but you can’t always empty an apartment building all at once because you have leases that have different terms, so you may not have all your tenants that are available to move out. The other thing people usually consider is it takes a lot of money to do a renovation like that, one-by-one, especially to do the units all at once. The renovation project for 1345 Monroe cost just under $300,000, but when my client compared it to another building he renovated, he said he would absolutely do a full-scale renovation every time from now on.
There are several reasons it is beneficial to do a full-scale renovation all at once. The first is: you have economy of scale with your purchases. In this case, you can purchase twelve cabinets all at once, you can purchase twelve sets of hardwood flooring, and you can purchase twelve sets of appliances; all of these things can be bought all at once and end up saving you money. The second reason is: subcontractors. Because of all of the construction going on in Denver, it is very difficult to get subcontractors to commit to working on several smaller projects in tandem. For example, it is much easier to get an electrician that will work on a big project all at once as it provides a lot more efficiency for the developer. The third reason is: a uniform tenant profile. Obviously, once you have renovated these units you can get all of the same tenant profile in the building all at once. This might not seem to be the biggest deal, but if you think about it, if you have some one that is paying $700/month living across the hall from someone paying $1,000/month, you are going to have a somewhat different mix of tenants. It is generally a lot easier, as you have emptied all the units out, to go ahead and renovate every unit all at once, to get your leasing staff to go through and do all the leasing at once.If you would like to read more about this topic, you can go to our blog where the article is posted. The main address is http://www.denverapartmentbuildingsforsale.com/. The direct link for the article is http://kmalnati.wordpress.com/2014/09/23/renovation-makes-sense-dollars-and-cents/ .
Some wisdom for the day, I always like to share inspirations with people watching the YouTube videos, followers of blog and the listeners of the podcast, is a quote that I picked up from a man named Scott Reid. Scott said, “This one step: choosing a goal and sticking to it, changes everything.” As I reflect upon making goals for 2015, this show is being recorded in October, so we have just a few months left to finish the year strong, what are you thinking about for 2015? If you are thinking about goals, it is a wonderful start to begin actually writing those goals down and start vision-casting as you break down what you think your year is going to be like in 2015. A lot of people talk about New Year’s resolutions, and I think generally most people know that New Year’s resolutions do not usually last very long. I think that goals, sustainable goals, get set generally several months before the year begins. What I have found, is when I sit down in October or November and decide how I want my year to look, what that does for me is it 1) tells me that I am going to be very intentional about how I want my year to look 2) as I sit and think about what I want my year to look like, I actually break down all the steps to achieve those goals. So, you start with this big major goal at the top, and then you filter down to the step-by-step tasks that need to be taken over the year to achieve that goal. A lot of people talk about backing into your goals and I think that makes things so much easier. If you just start with your big goal and say okay, what would have to happen each month for me to get closer towards that goal, and as you are looking at each month say okay each week what do I need to be doing to achieving that goal. So again, the quote of the inspiration of the day is from Scott Reid: “This one step: choosing a goal and sticking to it, changes everything.”
Again, I would like to thank our sponsors Dustin Thome of Keller-Lowry Insurance and Laurel Rossi of Stewart Title.
If you would like to connect with me I’m on Linked In and I am also on Twitter, my Twitter handle is kylemalnati. Again our website is www.denverapartmentbuildingsforsale.com/. Thanks so much for taking the time to watch and tune into the radio show, we look forward to providing you with some great topics on our next show. Take care, we will see you around the neighborhood here in central Denver!