3 Factors to Determine the Feasibility of Asset Repositioning

by Groot Ethkeens Real Estate Content Writer

Giving your multifamily property a complete makeover is a great idea, and there are several benefits of doing so. The list includes increased rentals and a higher base for future increases in rents. Besides rental benefits, renovations and repairs also help maintain the structural integrity of the building. However, before you go ahead and put your money into any renovation project, it is important to know the three key factors to consider when determining the feasibility of asset repositioning.

1. Opportunity Cost of Money

When investing money in asset repositioning, you must take into consideration the opportunity cost of the money. It means if you invest the same amount of money for the same period of time in another project, the return should be less than your current investment. Only then does it make sense to go ahead with your asset repositioning decision and investing the money required to complete the project.

2. Return on Investment

The changes or upgrades that you will make to your property will not last forever. They will undergo wear and tear, and you need to repair them after a particular time period. Therefore, make sure the amount you invest on your property gives you a substantial return that is worth your time, effort and money. Let’s say you spend $5000 on an upgrade that results in an increase in the rental by $100. If the upgrades continue to give you the rental benefits without the need for the same upgrade for the next 10 years, the extra rental you earn will be $12000.

3. Breakeven Point

The break-even point occurs when the money invested in asset repositioning is equal to the revenue generated through the additional rental that the owner starts receiving due to the makeover. Every time you think about remodelling or asset repositioning, take into account the time needed to break-even. If the period is longer than what you are comfortable with, it is better to look for other viable options available. While calculating the break-even point for your investment, you should also take into consideration the opportunity cost of the capital infused in the project or asset repositioning project.

Last Few Words...

There might be situations wherein the total returns - considering the time value of money and otherwise - may not be positive if you plan to take up an extensive rehab and facelift project for your multifamily asset. In such cases, you must only concentrate on those changes that are necessary for maintaining the structural integrity of the house. You may postpone a few other upgrades such as amenity upgrades or cosmetic changes that do not lead to any major changes to the existing rentals or property value.