Value-Add Renovation Budget Per Unit: How to Build It
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A value-add renovation budget per unit is the total cost to upgrade one apartment, built from a written scope, contractor bids and a contingency line, and then compared with the extra monthly rent the upgrade is expected to earn. The number that matters is the return on cost: the added annual rent divided by the cost of the work. Sponsors who raise capital with DoorRaise usually put this budget in the business plan, because investors fund the renovation and then rely on the rent premium to appear.
This post shows how to build the budget, how to test the rent premium and a hypothetical example. It supports our value-add business plan guide.
How do you build the budget?
- Inspect the units. Walk a sample of units and the building systems. See property due diligence inspections.
- Write the scope by category: flooring, paint, cabinets and counters, fixtures, appliances, lighting, plumbing fixtures, hardware.
- Get bids from at least two contractors for the same scope, in writing.
- Add a contingency line for surprises behind walls and price changes.
- Add downtime. Each unit earns no rent while it is being renovated, so include the lost rent.
- Add exterior and common-area work separately, since it supports rents across the building instead of unit by unit.
- Fix the timeline. A renovation done unit by unit as tenants leave takes longer than the plan suggests if turnover is slow.
A hypothetical example
This example is hypothetical, for illustration only. A 50-unit building plans interior upgrades at $8,000 per unit and expects to raise rent by $125 a month on renovated units.
| Line | Per unit |
|---|---|
| Scope cost from bids | $8,000 |
| Contingency | $800 |
| Lost rent while the unit is down (one month at $1,100) | $1,100 |
| Total cost per unit | $9,900 |
| Rent premium ($125 x 12) | $1,500 a year |
| Return on cost ($1,500 / $9,900) | about 15.2% |
For all 50 units, the plan costs $495,000 and, if every unit gets the premium, adds $75,000 of annual rent. At a 6.5% cap rate, $75,000 of added income implies about $1.15 million of value, which is the argument for the plan. But if the premium is only $75 a month, the added rent is $900 a unit, the return on cost is about 9.1%, and the implied value falls to about $0.69 million against $495,000 spent. If only 60% of the units are renovated, the numbers shrink again. Show the downside case in your model. See sensitivity analysis.
How do you test the rent premium?
- Find renovated and unrenovated units in the same market and compare their rents, using rent comps.
- Check that the renovated comps have the same finishes you plan.
- Remember a premium can shrink if market rents fall, and that existing tenants may pay below market. See loss to lease.
- Check any rent rules that limit increases. See rent control laws.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units under Rule 506(b) or 506(c). It prepares the offering documents from the sponsor's inputs, coordinates escrow with Enterprise Bank & Trust, collects investor funds by wire only and handles filings. The deal page lets you explain the renovation plan and its assumptions to investors. DoorRaise does not verify a seller's or a sponsor's numbers; sponsors must check what they present.
DoorRaise is for apartment buildings with 5 or more units, and sponsors can launch their deal here. Setup is $1,500 (non-refundable), and the administration fee is $5,000 a year from closing.
To get started, create your sponsor page or see the fees.
FAQ
How much does a value-add renovation cost per unit?
It depends on scope, building age, location and finishes, so use written bids for your building. Any number from a blog is only an example.
What is return on cost?
It is the added annual income from a renovation divided by the cost of the renovation. It tells you what each dollar spent earns before financing.
How much contingency should I include?
It depends on the building's age and how well you have inspected it. Older buildings with more unknowns call for a larger line, and your lender may require one.
Do I renovate occupied units?
Usually units are renovated as tenants leave, since the work needs an empty unit. That makes the schedule depend on turnover.
What if the rent premium does not appear?
The return on cost falls and so does the implied value. Include a case with a smaller premium and decide how you would respond.
Sources
- Fannie Mae, Multifamily fixed-rate mortgage loans
- 17 CFR 240.10b-5, Employment of manipulative and deceptive devices
This article is general information, not legal, tax or investment advice. Talk to a securities attorney and a CPA about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.