5 Steps to Maximizing Returns on Investment in Commercial Property Renovation
1. Know the Formula. When it comes to commercial real estate, Return on Investment (ROI) should guide each renovation decision. While research and careful planning help avoid renovation mistakes, it can also point to those investments with the best operating payback and increased market value.
2. Know how long you plan to hold the property. ROI analysis begins by understanding the time you have to recoup an investment. If you are selling tomorrow you want to focus on quick-fix options to improve the sales price. If you are holding for 20 years, you may look to minimize total annual expenses with more capital investment up front.
3. Quantify the Cost. Take several bids for renovations or repairs you are considering. If your roof is leaking and you try to sell, a buyer will likely ask for a discount for the actual cost of repair or replacement plus some additional risk premium. He is going to give himself plenty of cushion to make sure he can get the work done. If you are able to show actual bids, the buyer may just negotiate on actual cost. If you are planning on a longer hold, you can now balance the cost of the replacement with warranty term to cover your holding period. In either hold scenario, you need to begin by knowing your costs.
4. Quantify the Income Gain or Cost Savings. Use market research and review of comparable properties to determine if the renovation will improve rental income. If similar properties in better condition are leasing for a higher rent, it is likely your property is a candidate for renovation. If the renovation is likely to result in a cost savings, then your corresponding increase in Net Income will be used in the calculation.
5. Run the Numbers. Using the formula for return on investment, calculate the rate of return for each repair or renovation you are considering. Measures of return are used for comparing alternative uses of your money. Choose the repair or renovation with the highest acceptable ROI and proceed.
Now: Here are 6 Simple ideas to boost Return on Investment of your property:
1. Clean it Up! This is usually the best place to start. Whether you are holding short or long term, one of the best investments you can make is keeping your property presentable at all times. A dumpster and a clean-up crew cost almost nothing relative to the impact on Value.
2. Cosmetic Improvements are necessary and worthwhile. However, adding touches that create new operating expenses, do not add value or increase rent may have a negative or low return on investment. “Paint and powder” approaches can sometimes be very effective in attracting additional rent in the short term so you can begin larger repairs. Use common sense, though. Painting an interior of a rental space before you fix the roof is never a good idea, though we see this done surprisingly often.
3. Renovating Vacant Space before identifying a new tenant can be risky. Pantagraph points out that, especially with larger properties, a major new tenant will often justify a renovation that produces a profitable, long-term lease.
4. Energy Conservation. Many renovation efforts that make a property more energy-efficient are potentially wise targets. According to a report by the Energy Department, more than 72 percent of all businesses make saving on utility costs a number one priority when choosing a location. Likewise, many tenants like to incorporate green factors into their marketing. These factors make renovations that deal with heating, ventilation and air conditioning units, insulation, and other green initiatives a good choice if the numbers show an adequate payback period.
5. ReBranding. Updating your property’s brand with a new signage plan is often a simple way to give your occupancy and rental income a boost with a relatively small investment. Adding modern signage to a property, including on-building opportunities, is an attractive plus for many properties, large and small.
6. Security Features. If a property is in a more exposed neighborhood, features that make the property safer and more secure can add value relative to other area structures. For example, better exterior lighting and smartcard entry control provide both perceived and actual improvements to the safety of tenants and visitors, and higher rent.
Renovation is one of the 3 R’s of commercial real estate. A little effort up front will ensure that any expenditure on renovations produces the desired return and enhanced value.