The desire to upgrade a rental property is probably the most common one among new investors. It’s easy to get excited! However, in order to maximize your profits, you want to avoid over-enhancing any property.
There are risks in improving rental properties too much, e.g. B. When the payback period is longer and your short-term return on investment is lower. Another risk is that you cannot refinance your investment. Excessive improvement also results in higher property maintenance costs. For example, if you invest a high-end oven for a low-end rental (or a large margin between the repair cost and the repair guarantee), your long-term overheads will be higher than the upfront cost.
So we know why We shouldn’t improve too much, but how can investors avoid this trap?
Imagine the end market
Before you begin your next renovation project, it is important to consider what you are working on and what its purpose is.
For example, there are renovation stages with renovation projects.
Tenant renovation is about making the property safe, presentable, and of a certain quality, but the finishes must be on the value side of the options available.
That means using the same color, tile, floor, toilet, sink and faucet every time (assuming the items are still available). This includes replacing all electrical plugs and switches as well as repairing windows or the roof. Also, make sure certain things like cleaning the main water line and checking / maintaining the HVAC are done before the tenant moves in.
The next is high quality rehab. This includes searching for offers on quality pieces. Make sure everything was done correctly when coding. Make everything clearly visible inside and out.
It’s amazing how much the little things like caulking windows before painting and freshening up plugs and switches make everything look better. Don’t skimp on small things that could have a big impact on the presentation of the property.
That being said, some properties require more attention. This could be replacing the HVAC or completely upgrading electrical and plumbing.
Make every detail look clean and modern inside and out.
More about flipping & rehab from BiggerPockets
Numbers about subtleties
Think about refinancing
Plan the exit section of your process first. That means speaking to a lender before buying or bidding to make 100% sure that your refinance (refi) strategy is specific. The biggest hurdle people encounter after buying a home, assuming they can refi, is that something is wrong after the rehab and referral of the tenant.
The lender can tell you what hurdles you may have to overcome and where your strategy is lacking.
Think about ARV
You need to know with fair accuracy what a rental is worth after the repair. An incorrect After Repair Value (ARV) means that you can very well over-improve the asset. This will throw off your refinancing.
Think about rental prices
Before buying, you should know what the rentals in the area are for. Just like finding the ARV, you’ll be checking out the comps – and you should get pictures of them. Make sure your purchase looks like the other houses or buildings.
Does the house next door have formica countertops? Does it have tile or parquet or laminate floors? Does it come with newer devices? Ask your contractor about the budget of the items.
First find market rents that correspond to the ARV through your broker and then use the Internet for your own research. Hopefully you also have investor friends who can give you some insight. Finally, ask the person collecting the market rents (i.e. the property manager) what they think the property is renting the rehab for.
Start browsing today
Are you inspired to quit your 9-to-5 job and start turning houses? In The book about turning houses, Real estate fix-and-pinball expert, J Scott, describes a step-by-step plan to make your first – or next – house flip a success.
Think of strategy more than style
Measure response rate
Why spend money on your rental unit? There is only one answer: to achieve better returns over the long term.
Any improvement you consider, from new flooring to central air conditioning to a new deck, has to be justified by higher rents. Period.
Before making any improvements, you need a good answer to the question, “How much more can I get in rent if I invest in this upgrade?” Then determine how long it will take to get the cost back.
A word of advice: the best upgrade investments will pay for themselves in a single lease, say two years. Many real estate upgrades have diminishing returns, either because the tenant is wearing out or because technology and taste change. After all, olive green devices were once on everyone’s lips, but how long did this trend last?
You need to target a price point and then promote it. You can measure your accuracy and success by looking at the response rate to your rental offer. How many people get in touch with you with interest? Be sure to adapt to demand in the area; Some neighborhoods may not get you many responses regardless of price.
Take advantage of outstanding amenities
Some amenities are unusual enough to grab the attention of potential customers and intrigue them. They can make up for or even outweigh other shortcomings.
This can be anything from smart home technology to a wine cellar to a hot tub.
Prioritize poor improvement
Anyone who makes dinner knows that undercooking is better than too long – you can always throw it back in the oven. However, you cannot boil it out.
The same applies to rental properties. You can’t spend the $ 3,000 on new hardwood floors. However, you can always keep making improvements over time.
Let your response rate guide you. If you get a lot of responses from qualified applicants, congratulations. If the phone is silent or you are only getting unskilled applicants, spend five minutes and € 0 updating your rental listing promoting the new upgrade or amenities you are considering. Then, when qualified applicants call, you can send a contractor to perform the upgrade.
Keep good tenants
Keep good tenants, because sales are profit killers.
So how do you keep good tenants? In addition to being responsive and polite, make the occasional upgrade and then increase the rent.
Train your tenants that rents are increasing every year. Rent will never go up by an astronomical 20%, but you should expect an increase of 2 to 6% every year.
Check in with them regularly to ask what upgrades and amenities they’d add if they could wave a wand. Your tenants will no doubt give you great ideas, and these upgrades can increase marketability and expected rent for the next tenancy. Look for sturdy, permanent improvements that will survive this tenant’s occupancy and help you rent the property for a higher amount next time.
Be realistic with tenants
One reason people improve rents excessively is because they are emotionally attached to the property or the tenants. This usually happens with the first property, because every well-intentioned landlord wants to provide their tenants with a beautiful building.
It’s exciting to get better at first, but the profitability of a property comes from the mundane. Investors need to be very concerned about the condition of their properties while being sensible and conscientious about their investments.
Improve your property to the same level as the closest neighbor – and nothing more.
You may be emotionally attached, but the truth is that as long as everything works, the tenant doesn’t care about the house or building itself and doesn’t care about the type of flooring or the brand of the refrigerator.