Renovating apartments for profit

Landlords need to spend money to make money
Monday, July 8, 2013
By Derek Lobo

From 1975 to 1998, rent control in Ontario stifled the maintenance of apartments. When landlords weren’t allowed to raise rents higher than the statutory limit, they had little incentive to upgrade their properties. Not only did construction of new apartment buildings essentially grind to a halt, the remaining stock was allowed to age.

However, in 1998, Ontario switched to a vacancy decontrol system. This gave landlords the opportunity to renovate apartment units and raise rents to market levels. Since landlords have had an incentive to fix up their units, they’ve spent hundreds of millions of dollars renovating Ontario’s aging apartment stock. Parquet flooring has been stripped down to the wood and received a dark stain. Bathrooms have been outfitted with new porcelain features, ceramic tile and brand new fixtures. And kitchens have received a face-lift with granite or high-end linoleum countertops, new cabinets, upgraded lighting and stainless steel fittings and appliances.

The effect has been transformative, especially considering the state of the units prior to renovation. Buildings that were built in the 1960s and ’70s were looking tired and obsolete by 2012. The new renovations have turned these older apartment buildings into essentially new ones.

A number of landlords are already receiving substantial returns on their investment from gutting old units and rebuilding them. A standard renovation costs approximately $10,000 per unit. This isn’t a small chunk of change, however, investors in Hamilton and Toronto have found these renovations have enabled them to increase rents by between 15 and 20 per cent. A rent increase of $200 per month pays off the cost of the renovation within five years, and landlords can expect to benefit from these changes for decades to come.

Upgrading older buildings does not stop with individual units. To get the best rents, it is vital to provide a good “street-to-suite” appearance. There’s no point renovating the inside of an apartment building into one with “A” quality units when the rest of the building has “C” quality curb appeal, lobby and common areas. The first impression of an apartment is not the apartment itself but the walk leading up to it.

Even if a landlord is not planning to hold onto a building, renovations are a good way to improve the value of a property ahead of putting it on the market. Upgrading a selection of units and raising rents accordingly will entice investors – it shows them stronger returns are possible if they buy the building. Showing this upside helps a landlord get the best price possible for their property.

It can take awhile to prepare a building for sale and it can be a challenge to know which renovations are the best renovations to lower a building’s operating costs. Bringing in a professional such as a broker with experience in the apartment industry can help. An experienced professional can look at a property and identify key areas where a small amount of investment will produce the biggest benefit.

Nothing lasts forever and buildings are no exception. Years of foot traffic, tenant use and exposure to the elements mean that roofs need to be replaced, plumbing needs to be repaired and floors need to be re-laid. Maintenance costs increase over time. Changing styles and new technologies also render properties out-of-date, especially compared with new buildings just coming onto the market. No matter how valuable a property, a landlord can’t simply hold onto it. Like a living thing, a building needs care and upkeep.

Derek Lobo is CEO of Rock Advisors Inc. He can be reached at dlobo@rockaptadvisors.ca.

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