Repositioning with smart renovation: rehabilitating an apartment building can be a smart business move. When done right, it is a win-win situation that favorably repositions a community against the competition, adds value to the investment, increases cash flow and enhances residents' experiences.

Apartment owners can achieve a lot on a tight budget if they use a little ingenuity and focus on increasing the community's emotional appeal rather than just the nuts and bolts. Whether owners want to reposition the property or just improve its appeal, whether they have a small budget or a large one, they must remember that the goal is to create superior financial performance for the property.

The business strategy must drive the renovation and capital spending strategy. When a management company focuses on repositioning underperforming properties to higher levels, it ensures that these investments in rehab pay off with higher rents and higher-quality, longer-term residents.

Gather Information

Before undertaking any rehab project, understand not only where the apartment community currently stands in relation to the market place, but also where it can be. Start by doing a market survey of competing properties and those of a higher quality that might not be considered direct competition. Look for holes or areas of need in the market that might fit the project.

Second, perform a community needs assessment. What does the community lack? Based on observations, what can make the property more competitive or special?

Third, understand the limitations, including budget. Once the competition is clearly defined, decide the simplest, least costly way to differentiate the property from this group.

A few decades ago, the competition would have been nearby communities, close enough in proximity that prospects would pass by them when visiting the target community. Now, with so many renters searching for homes via the Interact, the competition is now defined by each online apartment service's search results. The property suddenly may be competing against buildings in different areas. Consequently, those in the immediate neighborhood may no longer be primary competitors for future residents.

Focus on the Experience

Retailers have learned that customers will pay more for an enjoyable, upscale experience, which is why the same shirt may cost more at Nordstrom than at T.J. Maxx. Similarly, an apartment owner can build value into a property by improving the quality of the experience for visitors and residents.

First impressions are important. By developing the areas that lead up to and surround a property, an owner can impress and win over residents, even if the apartments themselves do not stand out substantially from others.

It all starts with curb appeal. Signage, landscaping, the color of the building and accessories, such as ornamental gates, awnings, banners or flags, all help set an impression of the property's level of quality and the rents the residents might be willing to pay. Owners want to always be thinking about the "marketing corridor," which is the actual path prospects will likely take, step by step, as they visit the property.

Script the tour and create positive impressions or "areas of enhancement" to appear at least every three minutes along the way. It is important to maximize positive impressions along this critical path. Simple, affordable improvements, such as building an arbor, adding a fountain, placing a set of classic gates along the path or installing a simple bench and flowers along a shaded entrance may be all that's needed.

Maximize Unit Upgrades

As important as common areas are, apartment interiors are also crucial. The adage that kitchens and baths sell a home is still true. This doesn't mean that it is necessary to install all new cabinets and a Jacuzzi, but maximize the impact of these spaces as much as possible.

If the apartment has a small kitchen, try to open it up. Sometimes removing a few cabinets and creating a pass-through to the dining area helps. The goal is to create the feelings of high quality, newness and openness. An owner can save money by either re-facing cabinets or just painting and adding new knobs.

When replacing cabinets and countertops, think maintenance. With labor costs what they are, spending a little more on better materials usually makes sense. An owner will get more life out of them, they'll look better and they will usually bring in a little more rent. Little extras go a long way.

Be Memorable

Being the first to adopt new trends is another great way to differentiate the property. Visit the models at new single-family communities to learn what homebuyers expect, and be among the first to offer these new amenities in apartments. The more an owner can make the apartment feel like a single-family home, the better. Designer paint colors are an easy and inexpensive upgrade that helps create a contemporary look and feel.

High-quality, durable flooring at the entry lays the groundwork for the quality of the rest of the apartment. As the "welcome center," the entryway should display an apartment that the prospect would be happy to come home to.

Being a little trendy in easily changeable items, such as paint, can actually win converts tired of the "bland over bland" look. Remember, trendy paint colors are easy to change, while trendy colored flooring is not.

A three-tone paint scheme--walls one color, ceiling a neutral white and trim another color--costs only a little more than a standard one color scheme but makes a dramatic impact (and leases for more) than the less imaginative competition down the block.

People usually will pay more for an apartment with larger square footage than for a smaller one. If apartment homes fall on the smaller side, create the illusion of spaciousness to maximize the value of the apartment.

A small kitchen can look larger if an owner opens it up with half-walls into the living and dining areas. Lightening the color of the cabinets and increasing counter space wherever possible are low-cost ways to make the kitchen feel larger. When showing an apartment or a model, bring in as much natural light as possible and use a variety of light sources in each room to trick the eye. Strategically placed mirrors do wonders in expanding visual space.

Color also can help. A light color pallet is best for smaller spaces. When changing surfaces, such as from carpet to tile, keep similar tones to make the space appear larger. Design elements and colors should continuously flow from the outside to the inside. An attractive patio setting is an excellent way to visually expand a small space by allowing the room to "flow" to the outside. When using hard-floor surfaces, carry the colors outside to the patio.

Work With an 'A, B, C' Plan

To avoid doing too much too soon, start by drawing up an "A, B, C" plan--a priority to-do list of everything needed for the property. Tackle only the top jobs in the first round of improvements. "Fast track" the rehab, essentially following the "marketing corridor" described previously. Work on the exterior first, and get a model or sample unit finished to show prospects what to expect when the renovation is complete. Improve the appeal of the leasing office. After that is finished, proceed with apartment interiors and some of the less critical common areas.

Consider offering two levels of upgrades and different prices to see what the market wants and what residents are willing to pay more for. Despite research, it is easy to guess wrong. Seeing which options are the most appealing allows an owner to change course and compensate for any mistakes. Owners still have the opportunity to improve a property later, when they may have a better understanding of the market and their residents.

On the same note, it is not necessary to renovate all apartments the same way. Sometimes an owner can maximize value in differentiating the units. Horizon had a property that had wood floors under the carpets. Refinishing the wood floors on only the first floor gave those units more character, while avoiding the sound transmission issues that hardwood on the second floor would have created.

Stay on Track

As leasing starts, an owner may find that despite the best research, renovations are not quite maximized to the market. A few revisions of the rehab plan may be necessary to maximize the return on every rehab dollar. Some improvements have only marginal value and, therefore, should not be done. Always ask how much additional value the rehab is generating.

Renovations that create a new feeling in a building are a source of pride for an owner and residents. Don't believe that residents will flock to a community with the bells and whistles no matter the price. Location plays a key role, and every neighborhood has its top price range.

Renters who can afford to pay beyond the top range in a certain neighborhood will usually move to another, better area. Don't push the high-end rental price in a neighborhood without having a strong sense that buyers will pay.

Simple Upgrades That Make a Big Difference

Little extras go a long way in getting higher rents and retaining residents. At a minimal cost, these special features in apartment homes give the message that the owner has a top-quality company that takes pride in the community and cares for residents.

* Put the on the bathroom floor to make it more luxurious, Save money by using shower curtains instead of installing a shower door. This combination is not only more durable, but it will cost less than a shower door with a vinyl floor.

* A simple appliance upgrade, such as a stove with a digital readout, shouts "new" and may be all it takes to catch a prospect's eye.

* A pair of glass doors on one well-placed kitchen cabinet adds a touch of class but adds only $50 to the total rehab budget.

* Try re-glazing old countertops instead of replacing them. At a fraction of the cost, choose from a variety of colors and finishes, including simulated granite.

* A few accent tiles in a bathroom cost about the same as having tiles all the same color, but add character and make the room more appealing.

5 Renovation Tips

1. The Marketing Corridor. Owners always want to be thinking about the "marketing corridor," which is the actual path prospects will likely take, step by step, as they visit the property. Consider building an arbor, adding a fountain, placing a set of classic gates along the path or installing a simple bench and flowers along a shaded entrance.

2. Simulating Space. If the apartment has a small kitchen, try to open it up. Sometimes removing a few cabinets and creating a pass-through to the dining area helps.

3. Creative Color. A three-tone paint scheme--walls one color, ceiling a neutral white and trim another color--costs only a little more than a standard one color scheme but makes a dramatic impact (and leases for more) than the less imaginative competition down the block.

4. Unique Character. Refinishing wood floors on only the first floor can give units more character, while preventing the sound transmission issues that hardwood on the second floor could create.

5. Know Your Limits. Don't push the high-end rental price in a neighborhood without a strong sense that buyers will pay.

Dan Lieberman is President and Founder of Horizon Management Group, a real estate management, development and investment company based in Oakland, Calif. (www.renthorizon.com).