Investment

Renovating Your Rental Property. Good call, or Bad?

By May 14, 2019 No Comments

Skip the house flipping and spruce up that property for long-term financial gain!

I was 29 when he purchased his first rental property. One of my biggest regrets is that my wife and I didn’t start sooner. My idea was simple: I would buy a house, fix it up a little bit & rent it out to pay down the mortgage. Now, years later, what was once a hobby has resulted in a larger portfolio with a steady cash flow.

While I know people who have flipped the occasional house, I’m exclusively a buy-and-hold investor. I opted to go the rental route because it’s less risky and fits in with my long-term financial goals.

Skip the flip!

In 2016, as many as 5.7% of all home sales were home flips. Whether inspiration comes from Insta or binge-watching HGTV, the appeal is obvious: quick profit.

While the market can certainly be profitable, it’s also very competitive (especially here in the Twin Cities). What was eye opening to me is that the average gross flipping profits nationwide have decreased for three consecutive quarters. These numbers, in conjunction with rising rents, make residential rental properties an appealing option for real estate investors.

Rental investments come with their own risks if you don’t do your homework. After all, nobody wants to end up stuck with a money pit. If you’ve decided to renovate a property to rent out, here are a few helpful hints to get you started.

Investing in a “fixer-upper”

The average multi-room home renovation comes in at just under $40,000. However, a renovation can easily be much more expensive. Kitchens and bathrooms can be costly to renovate, especially because of big-ticket items like appliances.

In theory, you want to make your investment really nice. But if it’s a rental, you have to watch what you’re spending on repairs and renovations in comparison with the max rent you can charge. In real estate, cash flow is king.

So how can you make a rental appealing without going overboard on renovations?

Budgeting like a boss

First things first—make a budget. Estimating costs on a remodel can be challenging, but careful planning can save you time and money. Determine how much you can afford to invest in renovation costs. Then, assess your property to get an idea of how much work needs to be done.

Remodeling magazine’s 2017 Cost vs. Value report suggests starting with projects that involve replacing something broken, rather than projects with the sole purpose of making something look better.

For example, new granite countertops in the kitchen are beautiful but also costly. Roofing repairs, fixes to structural damage, and improvements to windows are all justifiable renovations. (Hint: Knowing the difference between repairs and improvements is helpful when tax season rolls around and you’re looking for deductions.)

Doing it (mostly) yourself

Once you have your budget set, it’s time to make a list of projects and decide which ones you can handle yourself vs. what you’ll need to hire a contractor for.

There are basic repairs and upgrades that most people are comfortable taking on, such as putting a fresh coat of paint on the walls and putting down new laminate flooring. These little low-cost fixes go a long way in improving a home.

Don’t forget to make improvements to the exterior of the home as well. While interior renovations are more visually appealing, exterior upgrades actually generate more bang for your buck. Curb appeal projects, such as replacement doors, windows and siding, can generate significantly higher returns than work done inside the home.

For bigger projects, such as full kitchen remodels, you’ll probably want to hire someone to help you out.

Hiring someone to help

Even if you’re fairly handy, some jobs are best left to the professionals. That said, it’s not always easy to find the right team to get the job done.

I  suggest having a good, reliable carpenter plus a plumber and electrician on standby for emergencies. Trust me, you don’t want to be scrambling to find a good plumber while water from a leak quickly ruins your ceiling. But if you do, find a software that can connect you with a pre-vetted vendor.

In Minneapolis there are also awesome Facebook Groups you can join to network with others to see who they use for those more “niche” jobs that have to be done.

You can also screen hired help online. Popular sites like Angie’s List and Yelp can be helpful, but you oftentimes end up paying a premium because the vendors pass through the marketing costs of those platforms onto you as the consumer.

 

Making tenant-friendly upgrades

Once your rental home is sitting pretty, consider making minor updates, such as replacing light fixtures or upgrading appliances. Wehen you’re shopping for appliances, fixtures, and other items for the interior of the home, look for wholesale options with lower prices. For us, our free property management software includes access to appliance & flooring wholesalers – among others.

 

Choose durable materials that are more likely to hold up, so you can avoid renovations over the years. The longer the lifespan of a remodel, the more profitable you’ll be. Avoid anything too flashy or high-end, such as expensive materials or bonus features like fireplaces and pools. While these items can be nice to have, they probably won’t pay off in the long-term.

Some popular amenities that appeal to renters include:

  • A fenced-in yard for pets
  • Outdoor spaces
  • Extra storage space
  • Off-street parking
  • Secure bike parking
  • In-unit washer/dryer
  • Area security (fenced in, well-lit, etc.)

Of course, renovating a rental is only stage one. Whether you renovate to rent or flip an investment property, the right strategy will put you on the path toward achieving long-term financial gains.