There are many reasons to invest in upgrading your rental property. Maybe you want to update the units to attract new tenants or you need to make improvements to keep your existing residents happy. However, to truly maximize the value you will receive for the money you invest, you need to do enough research and planning to know the items you are adding will have a disproportionately positive effect on value.
Not all renovations add value to the rental property in relation to their cost. It is easy to over improve. If prospects aren’t willing to pay higher rents for your renovations, you can upgrade all day long only to see your cash flow diminish. You also have to identify the upgrades that will actually drive rents.
Choosing the appropriate renovation level starts with your location and the neighborhood norms for your area. What is your competition providing in your price range, and what is offered in the next tier up from you? What is the gap in rent and might you be able to capture some or all of that with your renovation? You need to begin with the end in mind for what you can realistically receive in rent once you perform the rehab work.
Many property owners and operators waste a substantial amount of time and money focusing on the wrong upgrades. There are times when a full, gut rehab is called for and you get to put in everything new. But, in most cases, you will not be able to recoup the money you spend on the renovation if you don’t carefully plan what to improve – and what to leave alone.
In this article, we will discuss renovation mistakes frequently made as well as where you should focus. The following mistakes are listed in no particular order of importance.
Mistake #1: Not creating a clear vision including scope of work and budget
Under or over-renovating is a common trap multifamily owners and operators can fall into. Before deciding what needs to be done, you need to perform some exhaustive due diligence on similar properties in your area, analyze recent renovation projects, and visit some new construction projects.
Always remember that the renovation should be based on a business decision and not a personal one. Look for the features people are craving. If certain features seem to be resident hot buttons, it is probably worth your time to find a way to incorporate them into your plan.
But don’t be too trendy. Remember, these renovations need to not only attract the current tenant, but need to add value for several years and several tenancies in order for you to recoup your investment. So, use your discretion as to which features and styles should be incorporated into your plan. It is easy to change trendy paint colors. It is not so easy to change trendy tile colors. Decide which features should be ‘timeless’ and which ones you can adjust over time.
Some investors feel the most profitable renovation is replacing the flooring type from carpet to wood or a wood-like laminate. Others feel adding a washer/dryer will significantly increase ROI. Most will also say kitchens and bathrooms have a big impact on rentability. And while these guidelines are generally true, in some markets they may not be worth the investment. The key to finding the renovation ‘sweet spot’ is to perform an exhaustive amount of due diligence before deciding what needs to be done.
When planning your renovation budget and scope of work, you should give yourself a little wiggle room. You should have an emergency overage fund of about 10% for unexpected costs and delays. Also, you may discover, as you do your first few units that a slight change in the scope might bring you even more rent. Be flexible enough to make adjustments as your renovation plan progresses.
And remember, not all improvements need to be big ones. Sometimes small changes like adding pendant lights or a change of color can increase value as well.
Mistake #2: Not thinking about the timing of the renovations
It is also important, when planning renovations, to limit the number of days your units are down and off the market due to construction and to maximize your timing for units to be available at peak leasing season.
Be aware that many times jobs can take longer than budgeted for. So be extra careful as you approach the fall. A newly renovated unit that is finally rent ready on November 1st, no matter how nice, will need some strong concessions to quickly lease or else it may sit for 2 – 3 months, significantly reducing your return on investment for the rehab.
How you approach the renovation is also critical for its success. Renovating an apartment won’t get you much upside if the building lacks curb appeal. You want to set the tone from the moment the prospect arrives at the property all the way to your upgraded unit. If you can’t do the exterior or common areas first, at least get renderings created showing the future vision of the community.
Make sure to include quality improvements like upgraded landscaping, new signage, and visible common area amenities to your upgrade list. It is usually best to do property curb appeal items, common area amenities, and either a model unit or a similar unit that you can tour prospects through (by giving the resident a rent credit to allow showings) before focusing on your available unit.
Time of year and time of market cycle are also important. Although it is usually considered best to do renovations when the real estate market is strong, so that you can more quickly recoup your rehab costs, it can also be good to renovate during slower times when you might tend to have more vacancies anyway and average units will sit longer.
Mistake #3: Not using appropriate materials in your rental.
Many times, spending a little more on the front end will save you in the long run. Depending on your location and type of tenant, rental properties can experience substantially more wear and tear than a typical homeowner might experience in their own home. For example, if it was your home, and a spill occurred on your carpet, you would probably immediately try to remove it, and if your short-term fix didn’t work, you’d get a carpet cleaner out right away to give it an industrial strength clean. Although some of your tenants might also attempt to clean the carpet stain right away, it’s just as likely you, as the owner, might not find out about the stain for months, at which point, it might be impossible to remove.
Of course, you might also have the type of resident that stresses your rental. They flush things down the toilet that they shouldn’t, causing it to clog. They cut food directly on your laminate countertop because they don’t have a cutting board. They repeatedly squeeze your faucet into the off position in order to stop a slow drip, rather than letting you know the washer needs to be replaced, until the faucet is no longer fixable.
The bottom line is you need to review the materials you install in your rental and view them from a long-term life-of-use perspective. This will usually mean paying more up front, but saving more in the long run. Look around your property for items that are easy to break or be abused and either remove them or find a substitute.
Related to using appropriate materials is updating the unit to more modern standards. Some items are relatively easy to fix while in the process of renovating, but many owners forget to address them. For example, adding additional electric outlets may not appear to get you extra money, but prospects will notice when there are not enough of them, and therefore your unit will not rent as quickly or for as much (I have personally witnessed prospects counting the outlets in each room).
The other item that many owners fail to address when doing their renovations is to plan for potential future upgrades. For example, before we repaved the parking lot at one of our properties, I had the crew run some 4” PVC pipe underground across the driveway in a few areas. Since we were repaving anyway, it didn’t matter that we broke up a few sections in order to run the pipe. That pipe came in handy a few years later when we later installed a gate at the entrance (we ran our electrical lines through it) and when upgraded the irrigation (which was also run through the large pipes).
Mistake #4: Not tightly organizing the renovation process
Once the scope of the renovation work has been determined, your next goal is to ensure the job is performed efficiently and orderly.
Be careful in choosing your contractor. The intent of the renovation is to upgrade the rental unit and receive more rent. Hiring a quality contractor that will do a great job is just as important as choosing quality materials that will last a long time.
Many times, if you hire the contractor with the lowest quote, you may find they don’t do as good a job. They may cut corners or do sloppy work in order to stay profitable within their bid. Seek contractors with a record of success on projects similar to yours. Ask for, and actually check references. Go and see samples of their previous work if you can.
Create a written agreement with your contractor and include agreed terms and a schedule. Some of the items that should be included are:
- Scope of work
- Agreed price (or an hourly rate)
- Start date of work
- Expected finish date
- Penalties? (If the work doesn’t get done on time)
- Rewards? (if the work gets performed earlier or under budget)
- Payment schedule
- Permits
All of these terms are very important, but I want to add a note about the payment schedule, as this is where a lot of people get into trouble. Aside from the deposit and initial payment, you always want more work to be done than is paid for (For example: when half the work is done, you’ve paid somewhat less than half).
Paying this way serves two purposes 1) It lessens the odds that your contractors will take your money, then disappear for a while and work on their other jobs and 2) It allows you to have extra money to use should a contractor walk off the job or need to be fired. Also, hold back a small amount until after the work is 100% done and everything is completed to your satisfaction.
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As mentioned in the beginning of this article, there are many reasons to invest in upgrading your rental property. But, at the end of the day, you will want to ensure that your renovations and upgrades are done in a way that will help you to draw in more potential renters and increase the rental value of your property.
Remember to focus your upgrades on what your tenants will likely be willing to pay for, not just their wants and needs. Even class B and C tenants will like to have luxurious amenities. However, you may not be able to recoup the cost in your rents. It costs the same to install granite in a Class B building as a Class C building, but the amount of rent you can recoup for that will vary based on your property’s location and the competition.
Choosing the appropriate renovation level starts with your location and the neighborhood norms for your area. What is your competition providing in your price range, and what is offered in the next tier up from you? What is the gap in rent and might you be able to capture some or all of that with your renovation? You need to begin with the end in mind for what you can realistically receive in rent once you perform the rehab work.
You should review the success of other recent renovations and dig a little deeper to find out which amenities and unit features really are pushing rents. Ask the management what people comment on when they see the units. Review the rent levels they are receiving and compare to similar properties. Look for gaps in the market that can be filled with your renovation. And, review data on incomes and trends in your area to make sure people can afford it.
Always take the time to plan ahead. Although no one can know for certain which upgrades will work best, you can have a good idea based on your research and due diligence. Few things are as frustrating as spending thousands of dollars on an upgrade only to find that it didn’t have the positive impact on your income you thought it would and that it will now likely take more than a decade to recoup your money.
