Renovations: Pros & Cons
For those of you who already own your own rental properties, or those who are out to find your first, renovation is always something at the front of your mind. Today, I am going to break down what a basic renovation looks like, some of the mistakes you should avoid, and the type of return on investment that you can expect out of your time and money.
Disclaimer: Although I believe the core of this post will be applicable to most property, I am specifically going to be discussing low to mid end apartment renovations.
Renovating or remodeling your property can be a hard decision. There are multiple mental, emotional, and financial barriers to overcome if you want to be effective with how you approach your project.
Before we really get into it, let's cover a few basic pros and cons to renovating, and then we'll really break them down.
1. You will receive higher rents from your property.
2. You will have a lower vacancy rate than your competition.
3. You build a reputation in your community for supplying a good product.
4. Your property can be built to be less damage prone.
5. The value of your property increases.
6. You spend less money on maintenance request.
Alright, let's get into some of the meat.
1. When you renovate your property, you create a clean, newer feeling environment that people are willing to pay more money for. Your competition will often be unwilling to spend the time to raise their properties to the same standard, giving you an opportunity to set your rents 20% - 25% higher than theirs are.
2. When you own an apartment that has stained carpets, broken appliances, and leaky faucets, you're marketing to the lower end of the economy. You're going to lose money to vacancy waiting for someone in a desperate enough situation, or with a poor enough background, that they are willing to rent your apartment in the condition that it is in. Having a nicer apartment opens you up to a wider market where you can be more selective with your tenants, because you have significantly more demand.
3. Most people believe that residential real estate is a numbers business, and while after a certain unit count it does become that way, for anyone under 50 units, real estate is very much a people business. Slumlords develop a reputation in the community very quickly, and attract a certain type of clientele, likewise, there have been many people who have paid above market rents to live in apartments because the landlord have developed the reputation for being a good landlord.
4. This is one that I think most people miss. When you renovate your apartment, you do so in mind with the fact that tenants will never treat your property with the same respect that you would. That being said, when you're replacing the floors, you can put in floating luxury vinyl plank for roughly the same price as carpet, yet the vinyl is waterproof, impact proof, and scratch resistant... not to mention has a 15 year life span in residential. Building your apartment out with this kind of mindset allows you to increase revenue by becoming pet friendly... and charging for it. As well as decreasing expenses, by using material that is significantly more durable.
5. This is a two for one value. Eventually, I want to write a post specifically about this, because this is a really interesting topic. First off, your property value will increase because you have spent the time and money to improve it, and make it nicer. We've already covered that people are willing to pay more for nice things, not just when they're renting, but also when you go to sell the building. Secondly, however, is something that people starting out often miss. In general apartment buildings are valued most heavily on one aspect: How much income does it produce? That means, when you increase the rents because you renovated your property, you SIGNIFICANTLY, increased the value of your building over night. Seriously, out guys should check out the numbers on this in the next article I write. It's the easiest way to make $50,000 in the span of a month that I know of.
6. When you go through an apartment and fix all the issues up front, you aren't called back later. While you may think it entails the same amount of money to fix things now, instead of later, you are forgetting about two things: Repairs that are fixed later often cause additional damage, and after a unit is occupied, a handyman, or plumber, is going to charge you a service call, just to come look at the issue.
1. Renovating cost money up front.
2. Tenants destroy everything they touch.
3. Renovating your apartment is very emotional.
4. Renovating is hard work.
5. Time spent on renovation is money lost on rent.
Let's break this down.
1. If you just spent the majority of your money on the down payment for the building you just bought, you might not have money to pay the mortgage without renters in place, or to purchase materials and labor in order to renovate the property. It might be better to rent it for a year, and then renovate when those tenants move out.
2. If you aren't a seasoned landlord, it can be really difficult to put blood, sweat, and tears into a building, only to have it destroyed by tenants, pets, parties, etc, not even a year later. Knowing what to improve, and what not to improve, plays a huge role in avoiding this.
3. Renovating is EMOTIONAL. Nobody pays this enough consideration. Especially when you are just starting out, and you have worked very hard to afford/earn your property, you take great pride in it. This often results in the desire to over improve your property. You'll end up using higher quality finishes than you should, and making things nicer than you need to. It's hard to be objective, and only spend money on things that will actually result in an increase in rent, and on things that are necessary to repair. When you go overboard, not only does your return on investment go down, but tenants will end up wearing down and destroying your improvements anyways.
4. Have you ever cut off a finger tip while laying flooring? Pulled hairballs the size of tumbleweeds out of a shower drain? What about electrocuting yourself as you try to install new outlets? It's quite possible you'll experience all of these things if you decide to do the renovation yourself. It's definitely hard work, but you save substantial amounts of money by doing the work yourself, and the knowledge you learn is worth it's weight in gold.
5. This goes without saying, but it's something people often don't account for. All the time you spend on a renovation, is time that you aren't collecting rent, which equals revenue lost. It's really important to work as fast and hard as possible, to manage your capital, and get the apartment rented as soon as possible.
I am going to write another post in the coming weeks breaking down the ROI you receive for each type of improvement, and provide some tips about what types of materials you should actually use and why. If you liked this post, please sign up and subscribe to the blog! Follow us on:
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