Asset manager's turn model says 14 days downtime and $11,500 a unit. My crews have never hit 14 days.

Question

We're bidding interior renovations on a three-property, 1,100-unit portfolio an institutional buyer just took down as value-add. The scope sheet is standard: LVP, quartz caps over existing boxes, appliance package, lighting, paint, hardware. Their model shows $11,500 per unit, a $175 rent premium, 14 days of downtime and an 18 percent return on cost, and they want 240 units in year one across the three assets.

Two things bother me. First, 14 days assumes the unit is empty, pre-walked, materials staged and nothing behind the cabinets surprises us. On the classics at these vintages (mid-90s, some 1980s) we open a wall and find a supply line that has to be redone, and that's a change order and four extra days. Second, they're pushing 240 units in year one into submarkets that still have deliveries coming, and my leasing contacts at those properties tell me traffic is thin.

So the question for the capital side: how does an institutional model actually treat downtime and scope variance, and does anyone constrain the renovation pace by how fast renovated units can lease rather than by crew capacity? If we sign to 14 days and average 26, whose number breaks first, mine or theirs?

Rena Expert · Accepted Answer

That 18 percent is a gross return on cost, and it's doing less work than it looks like it's doing. $175 x 12 = $2,100 of incremental annual rent over $11,500 of hard cost. Net it down for what's missing. Fourteen days of downtime on a $1,500 unit is about $700 of lost rent. If the renovated unit leases with half a month free in year one, that's another $750. Carry a 6 to 7 percent vacancy and credit loss factor on the new rent and you're closer to 12 or 13 percent on a stabilized basis.

The premium is where the model lives or dies. $175 has to be measured against what an untouched classic in that same building can lease for today, on a net effective basis. Trailing averages from leases signed two years ago will flatter it, and in a submarket where classics have already moved up $70, most of the "renovation premium" is market recovery that someone will book against your scope.

Why it still gets funded: $2,100 of NOI at a 5.5 percent cap is roughly $38,000 of value against $11,500 spent, which is a real spread as long as the exit cap doesn't widen on them.

On pace, most institutional programs constrain turns by crew capacity and capital pacing, and set absorption as an output. Ask the asset manager how many renovated units per month per property the model assumes leasing, then compare it to actual weekly traffic. Taking 20 units offline at once in an asset competing with a nearby lease-up giving concessions means your renovated units and their own classics are bidding against each other.

And if the scope touches panels, sub-metering or any reconfiguration, permit and inspection timelines vary by jurisdiction and that's usually where 14 days becomes 30. Price the base scope to 14 days if you want, but get downtime past day 18 defined as an owner-caused delay where the cause is access or permits, in writing.

samantha_ruiz · Answer

The only way I've seen 14 days work is a materials cage on site with cabinets, flooring and appliances for eight units pre-staged, and a punch walk scheduled before the tenant is fully out. The moment you're ordering per unit you're at 25 days minimum because of appliance and countertop lead times. What's their assumption on staging space? On a 1980s garden asset with no vacant commercial bay you end up renting a 40 foot container and that's a real line item nobody put in the $11,500.

stephen_ok9 · Answer

Question from the other side of the table. When a sponsor reports "18 percent return on cost" on a renovation program in a quarterly letter, is that normally the gross rent divided by hard cost, the way rena-expert described it, or is it supposed to be net of downtime and concessions? Because if the standard reporting convention is gross, then every value-add program I've looked at is 5 or 6 points better on paper than in the bank account, and I've been comparing sponsors on a number that means nothing.

hannah_west29 · Answer

Ran cobalt's inputs at his numbers instead of theirs. 26 days downtime on $1,500 rent is $1,300 lost. Scope variance at 8 percent of units taking a $1,800 change order adds roughly $145 a unit blended. Call the achieved premium $145 instead of $175 because the classics have already moved. That's $1,740 of gross annual rent, minus vacancy and credit at 6.5 percent, on $11,645 plus the lost rent. About 11 percent, first-year basis.

11 percent return on cost against debt in the sixes is still positive, but it's not a program you'd stretch fund capacity for, and it's inside the margin of error on the premium assumption. What am I missing that makes it worth doing anyway?

tashaford30 · Answer

Naive question, but why vacate at all? If the premium is real, why not renovate occupied units at lease renewal and skip the 14 to 26 days entirely?

dpatel_re · Answer

quill, occupied renovation is a real strategy but it caps scope at surfaces and appliances, and residents in place don't pay the new-lease premium, so you get maybe 40 percent of the rent lift for 70 percent of the cost. It works as a light-touch tier alongside the full program, not instead of it.

ledger, the thing that makes it worth doing is the exit, and that's the part I'd argue with in the model. A renovated unit sells at a different cap than a classic-unit asset because the buyer sees a completed program with no capital left to spend. If they're capitalizing the $2,100 at the going-in cap they're understating the value creation. If the exit cap widens 50 basis points because the supply overhang in that submarket lasts through 2027, the whole spread goes.

cobalt, the practical answer to your last question is that your number breaks first, because your downtime shows up as your change orders and their downtime shows up as a variance line in a monthly report that nobody reads until the program is 60 units in. Get the day-18 language.

Asset manager's turn model says 14 days downtime and $11,500 a unit. My crews have never hit 14 days.

6 replies