Why developing a sound CapEx budget is critical for success

Our Approach

To differentiate ourselves in a saturated market we double down on “the why'' for our capital expenditures.  While we recognize that to raise rents we need to improve the condition of the asset that doesn’t have to be our only driver.  We at Team Saorsa want to add value to a distressed property to benefit not only our investors through increased rents but also to the tenants within the communities the assets exist in.  

We use three  baseline parameters to govern any value-add proposition: 

1. The need to improve the quality of life of current and future tenants

2. The need to validate any rent raises with key improvements

3. The need to leave just enough meat on the bone for the next owner/operator to own and manage, ensuring a strong exit plan 

The Saorsa Way defines our commitment to ensuring the above parameters while also elevating the tenant experience.  Elevating the tenant experience begins with empathizing with the tenants and understanding their needs and pain points.  We accomplish this during inspection where we make a pointed effort to not only tour the unit but also establish a rapport with the tenants.  By genuinely engaging with each of them we can relate and understand what their needs are which in turn becomes our business plan for adding value.  On our most recent project in talking to the tenants it became immediately clear to us that the lack of on-site laundry facilities was a major pain point for our tenants and allocated a significant portion of our budget to build out an on-site facility for them to take care of basic needs without having to leave the complex.   On the business side, this facility will be revenue generating as the hardware will require cashless payments, boosting our business plan.  The Saorsa Way enables us to prioritize the needs of the community while focusing on strategies that will strengthen our investors’ returns.. 

Developing Initial Estimates

Analyzing properties correctly is crucial. Without doing the right math before investing, you’ll never get the right profit. Capital Expenditures (CapEx) generally are the “big ticket” items that need replacing every few years or so such as roofs, appliances, parking lots or plumbing/electrical systems.   Poor estimates and budgeting cause owners to lose money which in turn negatively affects investors. 

Estimating a CapEx budget can be difficult as several factors need to be considered such as the property’s condition, age and type.  Our approach towards estimating our budget begins with establishing our assumptions for each item such as 1) how many years a roof or an appliance will last; 2) what is the condition of your plumbing; or 3) what will a new driveway cost? To calculate the cost per year we simply divide the estimated cost by the number of years each item/system has left.

However, we ensure our estimates are sound by bringing on quality partners such as Property Management with a great track record and inspectors with a sterling reputation for identifying risks and issues with the property.  By involving experienced partners in the process of estimating costs we greatly improve our chances of estimating correctly. As we go through the underwriting and due diligence process, we are constantly updating our assumptions and analysis as we refine these estimates. 

Prioritization

Prioritizing your capital expenditures is critical to driving growth on your property.  Different improvements will enable different increases in rent and at what time frame depending on when the project is planned for completion.  To effectively prioritize our planned work while considering various factors we leverage a prioritization technique known as Weighted Shortest Job First (WSJF).  WSJF encourages you to do the most valuable task first, where relative value is equal to the pure value divided by the size of the job. We begin by determining the type of weight to consider, then build the economic model, and lastly calculate the weight and effort for each job.  There are many different ways to calculate weighting and effort, we generally use a commonly known method which is the  cost of delay divided by duration of the effort.  The cost of delay is the economic impact of delaying the completion of the job.  To build the economic model to support this we determine the dollar value for the cost of delay. To find the dollar value of a given project, you can:

1. Look at similar projects and see how much revenue they generated

2. Find out the revenue that will be generated if deals contingent to the creation of a feature are closed

3. Research customer retention predictions from a feature and the revenue generated from those customers

4. Calculate expected penalties or fines for noncompliance

5. Use the existing revenue of the business as the dollar value for “keeping the lights on” jobs

6. Try numerous other custom methods that apply to your situation

The economic model should also include the job size, which is generally measured in person-months, but it can also be measured in pure months. Once the economic model is flushed out we determine the weight and size for each job and do a comparison to determine priority.

Execution

At the end of the day successful execution of the business plan is where the rubber meets the road. How we execute said plan allows us to increase rents to increase revenue which in turn raises the value of the asset.  To put us in the best position to raise asset value we need to complete our “value add” business plan by managing our capital expenditures.  To accomplish this we take the “manage the manager” approach by partnering with a Property Management company with a proven track record for executing value-add business plans.  More importantly we work hand in hand with them to provide leadership, executive decision making, mitigate challenges and identify issues proactively.