Large apartment property owners who have assembled a sizable portfolio typically haven’t achieved success by mistake or luck. The degree of performance is likely tied directly to some savvy investment decisions that are supported by well-conceived improvement strategies.
Those same best practices can be adopted by smaller multifamily property owners, too. In fact, Mike Rovner, president of Mike Rovner Construction, points out that smart investment decisions can be enhanced through long-term planning and a big picture perspective, regardless of the asset or portfolio size.
Lower Costs Today, Lower ROI Tomorrow
Rovner says, “One of the main habits a small multifamily property owner will do is step over a dollar to get to a dime. They try to be so cost-effective that they often miss opportunities that are there to increase ROI. Big owners usually have long-term vision of a 10 to 15-year period, yet small owners tend to look at 12 months.”
A reason large owners may take a different view about property improvements is they tend to hold properties and don’t usually sell them, so they are seeking long term hold and value and they base their decisions on that.
Small owners often try to hire repair people or execute remodeling contracts that they think are most cost-effective as possible. What happens is the project tends to take longer because the contractor doesn’t have the capacity or motivation to complete quickly, notes Rovner. He says, “Those types of owners don’t understand that completing the work faster will result in getting heads on beds sooner. Large owners are laser focused on the fastest course to getting heads in beds. Small owners don’t think that way and they are very cost focused.”
Large owners know that a higher quality contractor will produce a better result in the long run. They likely will be able to generate higher rents and that will lead to higher ROI’s for a large owner who pushes the envelope and is more aggressive based on their long-term strategy, Rovner notes.
On the other hand, he says, small owners are typically less aggressive. “They tend to be worried more about the perceived risk or exposure of spending too much. They steer clear away from that, while large owners take more risk,” Rovner says.
Investment Strategy for Multifamily Owners
Another way large and small apartment owners often differ is in how they procure and bid out projects. “Small owners will typically shop everything out and piecemeal a project together without a long-term strategy,” Rovner says. For instance, large owners know unit consistency is important down the road, even though it will take more time planning, estimating and buying all materials needed to complete the work up front. Additionally, it will require a larger investment upfront. They know selecting one plumbing or lighting fixture at the start of a project will result in uniformity, and they will save money over time if they go with a product that has a five-or 10-year lifespan.
A smaller owner may choose a product that is on sale today, and buy only what they need for one unit and a year later go with a different product, notes Rovner. “Down the line, that makes it more complicated for maintenance teams to repair things and if they haven’t gone with a product that lasts it could cost more to replace it because it wears out sooner,” he says. “Savvy owners know even though it may be more expensive up front it, could save significant money later.” Conversely, Rovner points out small owners may spend $100,000 a year on maintenance if they take a short-sighted approach, but if they’d spent $500 dollars more initially, they could have eliminated maintenance costs for 20 years.
Small owners are also likely to hire contractors that the industry labels as a “dog in the back of the truck” outfits. They may not carry all the necessary insurance, or may cut corners, or not pull all the required permits for a job. “When property owners go with the lowest-priced contractor, they may actually expose themselves to larger risks,” Rovner says. “Larger owners know a reputable and experienced contractor may cost a bit more, but they have more comfort with that decision since they understand the higher cost can be as a result of that contractor having all the right insurance, licenses, and quality people, thus their risk is reduced by going with them.”
An established contractor with a strong track record often brings comfort to an owner because it conveys stability and shows they likely will still be in business in the future, points out Rovner.
Affordability vs Longevity
Another area small owners typically won’t explore is sustainability or how long something will last. “They figure if they do it now and it lasts a year that is okay,” Rovner says. Large owners have come to adopt an approach based on longevity. They favor products that protect the property better over a 10- to 30-year timeframe. “We have some owners we work for who strive to build projects that last 50 years,” he says. “They know spending more now to achieve that is simply smart business.”
Smart owners may spend more now because it pays off later, Rovner notes. A key area of focus is investing in water proofing products that save the asset over the long-term basis. Those owners understand over a 20-year period they will make more money because they are not having to replace or fix things because of water proofing issues.
Large owners are also focused on executing and timing of projects. They seek to complete projects faster, and they may even issue a performance bonus for completing the project quicker. Rovner says, “We received a $125,000 bonus for finishing a project 30 days early. The owner knew if the 100 units were finished early, they could rent them out sooner and it would result in a $400,000 increase in revenue.”
Rovner says, “Small owners are often cost-adverse leading to decisions that are ill-advised. They won’t do things quickly, and they may leave a unit vacant three or four months simply because they don’t want to spend money right then. They think it saves money.”
Ultimately, those short-sighted decisions may actually cost an owner more in the long-term. That’s why Rovner advises both large and small apartment property owners to adopt practices that support long-term value-creation investment objectives, rather than short-term choices.