Repositioning multifamily real estate uses capital improvements and added amenities to spur rent increases and thus increase a property’s profitability and value. Adding value to an existing property is an essential strategy for investors looking to acquire older properties. With multifamily property development reaching the end of its current market cycle, repositioning is taking on greater importance for investors as they seek new opportunities.
Various Approaches to Repositioning Multifamily Real Estate
If you are looking to buy a property specifically for repositioning, you need to prepare for the search with a clear idea of your financial capacity and goals. Once your parameters are defined (with a little wiggle room) and set in a business plan, you can identify the most appropriate properties and negotiate the most favorable deal. Then, you can begin planning your repositioning strategy, which will of course depend on the property and its location. Here are a few basic repositioning strategies:
Strengthen Operations. As a source of passive income, your multifamily property should run more-or-less like clockwork and require only scheduled maintenance to produce consistent income. Taking just a few steps can transform your property’s performance:
- Improve management effectiveness. Assure, for example, that units are not left vacant too long and that residents are paying the market rate for rent.
- Attend to deferred maintenance. This could involve anything from a new coat of paint to repair or replacement of major systems (electrical, water, HVAC, and sewer).
- Optimize cash flow. Cut unnecessary costs to increase income where possible, such as by introducing RUBS (ratio utility billing system) to pass on much of the utility cost to residents.
While these steps are not complicated, they could incur high costs. Make sure you estimate repositioning costs and ROI carefully.
Go for the “Wow” Factor. If you find a Class B property in a Class A neighborhood, it may be worth investing in a major upgrade. Consider upgrading inside units with custom finishes, high-end appliances, and luxury bathroom fixtures, for example. You might also improve communal amenities. There are few limits to luxury add-ons, but you’ll want to consider regional desires and tastes. Ski storage is likely a big demand in Seattle, but not in San Antonio. Similarly, saltwater pools, a hallmark of opulence in coastal cities, might be perceived as excessive in landlocked regions, even in the most luxurious apartments.
Neighborhoods undergoing renewal may present special opportunities for multifamily property repositioning. Superannuated industrial properties can often be converted into highly desirable luxury housing, for example. Apartments with high ceilings, exposed beams, and brick walls—typical attributes of an old factory—are considered sleek and exclusive.
Target Your Audience. A property’s location and demographics define its repositioning options to a great extent. Families will value extra parking and storage, and pay for it readily. Apartment buildings in urban areas may be more valued for their walkability. Smart-home technology features will attract young professionals, but not many senior citizens.
Seniors, a rapidly growing resident base, will value universal design, however. Universal design is a combination of layout and elements that attract people with various abilities and/or limitations. Its elements are mainly found in kitchens and bathrooms, and include walk-in showers, grasp bars, and easily adjustable faucets. When planned correctly and integrated with luxury amenities, universal design is barely noticeable. But it will attract affluent residents specifically looking for those specific features and interested in aging comfortably and in place.
Practical Considerations in Repositioning Real Estate
Repositioning real estate requires financial planning and many time-consuming steps—consulting with designers, approving plans, finding contractors and coordinating their activities, and more. So, you’ll need to be pragmatic when strategizing. Some upgrades, such as those in communal areas, can all be made at the same time. Apartments are typically renovated more slowly to accommodate tenants. If you plan right, repositioning a multifamily property is an effective way to increase its profitability and value.
At CWS Capital Partners, we are a fully integrated multifamily real estate investment management firm that offers everything from due diligence and risk management to transaction support and property management. We specialize in assisting our clients with 1031 exchanges, acquisitions, repositioning, and development. We also own and manage luxury multifamily investment communities in major markets around the country and employ a team of experts who can help you hone your investment strategy.
For more articles like this one, check out our investment strategy blog posts.
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