Renovation Upgrading Cost Analysis
by Patrick O'Connor
Renovation / Upgrading Cost Analysis
Renovating and upgrading an investment
property acquisition is a source of both opportunity and risk. When a property
has deferred maintenance, the cost of curing the deferred maintenance can
be difficult to estimate without obtaining bids from contractors. Upgrading
a property is an excellent option for enhancing investment returns. However,
selecting which areas to upgrade and confirming, through analysis, their
financial feasibility can be a time-consuming project.
Preparing a plan for renovations and upgrades
is a complex project and needs to be integrated into the investor's overall
plan for the property. Consider the following examples of planning for
renovations:
Should an investor repair or replace the
roof on an office building which is being acquired as a land play? The
investor expects the building will be demolished within five to seven years
but wants to maintain the income stream during the holding period. Should
an investor patch potholes or do a complete overlay for a class C apartment
complex? The cost of patching is $20,000 while the cost of a complete overlay
is $150,000. The investor plans to maintain the property as a class C apartment
complex for the indefinite future. Upgrading an income property often offers
the investor an excellent rate of return. In many cases, the existing investment
group is complacent and does not want to expend the capital nor take the
risk to enhance the performance of the property. An ideal time to plan
renovations is prior to completing a plan for the capital structure and
total amount of capital required during the due diligence period. In many
renovation cases, the lender will fund most of the cost of the upgrading
if it is planned prior to the acquisition. Otherwise, the investment group
will likely have to fund the cost of the renovation if it is done at a
later point in time.
Following are a limited number of options
for property upgrades:
Upgrade the unit interiors for apartments
by adding granite countertops, crown molding, better quality cabinet fronts
and replacing drawer pulls. Other options are upgrading appliances, carpeting,
bathrooms, lighting and plumbing hardware. Modify the lobby and elevator
cabs for the property with a plain appearance. Upgrade the lobby, elevator
cabs and common areas. Replace and improve the facade and signage for retail
strip centers and other types of retail. Review upgrading signage and landscaping,
particularly near the leasing office. For industrial properties, consider
adding cranes, parking area, stabilized yard area and expanding the truck
aprons. The tentative plans for completing renovations and upgrades are
developed by reviewing rental rates, the quality of rent comparables and
through interviews with property managers, leasing agents and property
owners. In some cases, property managers and owners for competing properties
may be more comfortable discussing these issues with an independent appraiser
or market analyst than with a potential new competitor.
The next step is to obtain construction
cost bids for both deferred maintenance and upgrade options from local
contractors. Depending on the size of the item, multiple bids may or may
not be necessary for the purpose of determining a probable cost during
due diligence. Once the acquisition has been completed, multiple bids for
many items are often appropriate. (Either O'Connor or the client can obtain
these bids.)
After obtaining cost data, the appraiser/market
analyst is able to determine whether the contemplated plan meets the investors
financial objectives. In most cases, the renovation and upgrading plans
are scrutinized for opportunities to reduce cost and enhance yields after
obtaining cost data.
The final step is to consult with the client
regarding options, our analysis and conclusions. Reporting options vary
from a verbal report to a detailed narrative report.
By researching upgrade options the investor
can maximize their return. Obtaining construction costs mitigates the investor's
risk and makes it less likely he will need to explain to partners/investors
why renovation costs sharply exceeded the budget.
O'Connor and Associate's staff complement
of over 50 real estate professionals can plan the appropriate level of
renovation / upgrading and obtain construction costs. They can also handle
other due diligence tasks. These professionals are supported by an experienced
staff of over 100 who are accustomed to complex assignments. Our team has
experience in all aspects of real estate including acquisitions, due diligence,
ownership, appraisal, property tax appeals and dispositions. Reduce your
risk and stress by utilizing O'Connor and Associate's breadth and depth
of experience to evaluate your real estate investments.
To obtain more information on O'Connor
& Associates due diligence services, call or email lbrewster@poconnor.com,
Larry Brewster at 713-686-9955 or fill out our online form at http://www.poconnor.com/contact.asp.
O'Connor & Associates is a national provider of commercial property
real estate consulting services including tax reduction, business personal
property valuations, feasibility studies, property appraisal, & lease
audits.
Our services benefit owners of all commercial
property types including multi-family housing, retail stores, hospitals,
hotels, industrial properties, manufacturing facilities, medical offices,
commercial offices, restaurants, self-storage units, shopping malls, shopping
plazas & warehouse/distribution centers.
About the Author
Patrick C. O'Connor has been president
of O'Connor & Associates since 1983 and is a recipient of the prestigious
MAI designation from the Appraisal Institute. He is also a registered senior
property tax consultant in the state of Texas and has written numerous
articles in state and national publications on reducing property taxes.
He continues to set the standard in direction and quality of our appraisal
products, adding services ranging from bus
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