Flipping Houses

How to Avoid Over-Improving Properties (& Make Bigger Profits!)

Expertise: Real Estate Investing Basics
21 Articles Written
Businessmen are meeting with contractors about business plans.

Beginners almost always over-improve their first properties. This leaves you with a very nice asset to look at, but it leaves profitability on the table.

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I’m going to discuss how to know if you’re over-improving your properties when utilizing the BRRRR strategy. I want to explain it in a holistic manner, so that there is less chance to get caught up in the details of the improvements and lose sight of the overall strategy. I’ll describe how to go through the BRRRR flow so efficiently that the rehab portion becomes extremely simple. Focus on the big problems, and small problems take care of themselves. 

Think Backward When BRRRR-ing

Most people think about the process as you move forward through it, but adjust that train of thought. Instead, start at the end and work backward. 

The BRRRR method is buy, rehab, rent, refinance, and repeat. That’s how you go through the process in real life, sure. But it shouldn’t be how you design your strategy. In fact, if you plan things from a linear start to finish you, you might get yourself in trouble.

What I recommend instead is for you to reverse engineer the whole process. Before you even purchase the house, ensure you have strategically solved all the obstacles you may run into—like over-improving. Addressing them up front will reduce risks, increase your mental grip on the deal, and boost your confidence moving through it. 

man sitting at desk working on a computer

Start With the Refi

Plan the exit (refi) portion of your process first. That means making sure you’ve spoken to a lender before you purchase or bid on anything to make 100 percent certain that your refinance strategy is concrete. The number one hurdle people encounter is buying a house with the assumption they can refi, but after the rehab is done and the tenant is placed, they find out something isn’t lining up. Rookie mistake! 

Talk to some lenders. Find one you like that can offer the type of product that allows you to complete your project. Then, have them look through your financials and credit to make absolutely sure that you’ll be able to refinance out the cash you put in based on an example house.

The lender will tell you which hurdles you may need to overcome, and they may tell you where your strategy is lacking. Maybe the house size is too small for the loans they offer. Maybe the house is too big to finance because of your debt-to-income ratio. Maybe you wrote too much off on your taxes last year. Don’t assume you know what the lender will do. Ask them at the start of your process so you can be certain! 

Related: The Ultimate Guide to Finding an Incredible Contractor

Know Your ARV

I cannot stress this enough: You must know what a house will be worth when it’s done to a good degree of accuracy. If you get the ARV wrong, you very well may over-improve the asset. It throws your refinance off, as well. 

I ask my Realtor to provide me comps. I then run it against fellow investors in the area who have houses nearby. (This is why you should always be networking with people who invest near you.) When I find out what their houses are worth, then I come up with the most reasonable—albeit conservative—figure. If you only ask one Realtor, you have a single point of failure. Do you really want to rely on this one person who just so happens to make money on this deal, even if you don’t? I’m not saying you should not trust your agent. I’m saying you don’t have to trust them. Cast a wider net to gather multiple opinions. 

Once I have an ARV, then I can add in my rehab costs. My contractor will tell me what these costs will be, but as is the point of this article, we want to know what kind of rehab to perform for the most efficient use of capital. That’s the key: spending as much as you have to but not a cent more to get the property up and running.

Over-improving is a waste of resources and under-improving makes you a cheapskate, which will be reflected in the type of tenants you get. So, how do you find the right quality of rehab to deploy?

Improve to Market Rents

This is actually quite easy. I think most people get in trouble just from overthinking it—especially new investors who get excited about their shiny new asset and the emotional rush of the process. For long distance investors, you may have the urge to make your new property look like the properties where you currently live. Let’s avoid that, as well.

Before you purchase, you should know what the houses in the area rent for. Just like finding the ARV, you’ll check comps—and get pictures of them. Then, aim to make yours look like theirs. Ask your contractor for the budget to get there.

What I sometimes do is pull nearby rentals off Zillow or Craigslist, show the pictures to my contractor, and say, “Make it look like this.”

Businessman signs contract

Does the house next door have tile? Does it have formica countertops? Does it have hardwood or laminate? Does it come with nice appliances?

Whatever the rental house next door has is what mine should have. Your contractor will give you the cost to get your house to proper market conditions.  

There are obviously outliers to this. Sometimes I’ll find a 3/1.5 that I can make into a 3/2, or I can add a full bedroom from what was once a great room. If you’re doing bigger rehabs or changing layout, you still want to know what the end result market rent will be. That’s the final piece of the puzzle finding the market rent.

Find market rents the same as ARV—through your Realtor first, then use the internet. You’ll hopefully have investor friends to give you some insight, as well. Then, ask the person who is going to be collecting these market rents what they think the property will rent for post-rehab (that person being the property manager).

It’s so important to discuss the actual rent rates with whoever is going to be collecting them before you purchase. What if you get said property completed and the PM you lined up doesn’t think they can get that amount? What if the manager is just not confident about asking for top dollar on the deal? That fear alone can cost you! Line it up before the purchase. 

So, before we have even bid on a house, we have completed the whole process, and we’ve designed it in a way in which the market tells us what to do instead of what most people do—which is guess and then hope the market will reward them anyway. By this point:

  1. You’ve talked to your lender to make sure you have a clear strategy to refinance.
  2. You’ve talked to your agent and found a solid number for ARV.
  3. The property manager has explained what rent level you can expect.
  4. And your contractor has told you how much that type of improvement will cost.

You have all the information before you’ve made the purchase. Your team has been involved in the deal from the start, so there is no way you can surprise them later with a lousy deal. They won’t have to figure out how to make a crappy deal work. Doing it backwards leaves little chance for you to over-improve this unit. How could it be easier?

Related: How to NOT Over-Improve Your Properties: 3 Key Levels of Rehab Finish

Buy a House, Not a Home

The thing to keep in mind is to always buy a house—never buy a home. Here’s what I mean by that. 

Part of the reason people over-improve rentals is because they get emotionally attached. It usually happens most on the first one, because every well-intentioned landlord wants to provide a nice building for their tenants. It’s when you choose to buy granite instead of formica, or when you put nice ceiling fans in, or when you paint accent walls in a cheap house. These are just examples, but the point is to make sure you don’t get attached. 

Try to improve the property to the same level as the next closest neighbor—and no more than that. It’s one thing to provide a nice space for your guests, but you wouldn’t build a mansion in a trailer park right?

Extreme example aside, the principle is sound. If you own a mobile home park, stick mobile homes in there for people to rent.

The American dream teaches every kid that they are supposed to buy a nice home as they get older. They should buy the nicest one they can afford. If you’re reading this, you may not necessarily believe that, but it is part of our underlying cultural strata. People do act on that. People love to get attached to their homes, even when they are rental properties. But emotion makes for terrible financial decisions.

New landlords often over-improve their rentals because they want to be proud of them. I get it! But strive to be proud of your asset and proud of your income statement. Considering having a home as achieving the American dream is perfectly fine, but it’s a lousy investment strategy. If you want to buy profitable rentals, then don’t buy a home to love, just buy some houses and fix them up to make some cash money. 

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Does reverse engineering the process make sense to you? Do you have any follow-up questions for me? Or any other methods of determining how much to spend or which improvements to make to a rental property?

Let’s discuss in the comment section below. 

Alex has spent his career in sales and finance industries and now invests in rental real estate along with working in the underwriting department at a bank in Las Vegas. Alex is an expert in long-distance single family rental real estate, debt and leverage strategy, and financial analysis. He spends most of his free time teaching investors through writing and coaching to ensure their best possibility of success. Alex has been buying real estate for nearly three years and currently owns eight single family houses. He also helped fellow investors directly purchase over 20 properties in 2018. Alex’s writing can be found at BrokeIsAChoice.com, and more of his story can be heard on the BiggerPockets Podcast episode 301.

    Terry Lowe
    Replied 3 months ago
    I love your general idea. I have never put granite in a rental. And that is the right fit for my rentals. I don’t really agree with your idea of the next closest rental: 1 It May be over or under rehabbed. 2. I want my rental to be just a tad nicer than others nearby. It will rent first, and in bad times it will rent instead of sitting vacant for months. I often make that difference with lighting. Ceiling lights that are not 10-15 years old always make a unit look newer, brighter, more updated. It’s an easy, inexpensive way to give my units just a bit more marketability. And an updated neutral color as an accent wall is always an inexpensive winner!
    Nick Ceryance
    Replied 3 months ago
    I totally agree with you on this!
    Wenda Kennedy JD from Nikiski, Alaska
    Replied 3 months ago
    Yes, I agree not to over-improve. BUT, how much you do today -- depends on your future plans. I'm in the rental business. We do more work on my rentals than I would do on a property to sell. I solve problems before they happen by making calculated improvements. If the goal is to sell it, then this writer is correct. But, I take it one step further. Make it just a little better than the ones in the neighborhood. And plant some flowers next to the front door. You want your buyer to believe that they are buying the best house on the block. And the cost of those carefully planned eye-candy items is SO small compared to your profits!
    Kevin Polite Flipper/Rehabber from Decatur Atlanta, GA
    Replied 3 months ago
    I always improve my rentals a tad above what everyone else has in the neighborhood if it's an area that is appreciating. You also get better tenants this way as well and they tend to take better care of the property if you've put some care and thought, though not a lot more money, it makes a huge difference.
    Ean Frank
    Replied 3 months ago
    As a contractor whom exclusively works on museums, it’s a constant fight to lower my standards for residential construction
    Shua McLean
    Replied 3 months ago
    This is actually hilarious because I think museums have some of the most beautiful build quality around.
    Angel Perez Developer from Dana Point, CA
    Replied 3 months ago
    When it comes to knowing your ARV, do NOT put your whole trust in your realtor. On my first investment, I wholly depended on my realtor to provide the ARV. Upon completing upgrades on the property, the ARV was less than what was projected.
    Alexander Felice Guy with Great Hair from Las Vegas, NV
    Replied 3 months ago
    Agree completed. Your realtor is ONE part of your ARV estimates. Never use a process that has a single point of failure
    Dan Rivers Realtor from Charleston, SC
    Replied 3 months ago
    I completely agree with your worry about a Realtor giving an ARV and that is your only resource. I am a Realtor/Investor here in Charleston SC and it is so important to find a Realtor that is investor focused and one step better, invests themselves. If you find this, they are more likely to be more conservative and help you analyze the deal more efficiently. Why, because we focus on working with investors and we analyze deals for ourselves too. Not a self promotion, ok, maybe slightly but it is true. You want to find investment minded Realtors as it will be very beneficial. Great post Alexander.
    Thomas Evanchik Rental Property Investor from Dallas, PA
    Replied 3 months ago
    Well just because it's nicer doesn't mean it will rent first!! When I was in college my girlfriend at the time didn't want the nicest place. For one we were saving money. Two we had a puppy! All of them accepted pets as all accept children. If I had some terrror kids I'd go with the second nicest house on the street. It's cheaper, livable, and if I'm renting I'm smart enough to know not to look for the nicest rental. You'll learn and learn quickly
    Cathy Lippert from Solon, Ohio
    Replied 3 months ago
    Fine rule of thumb to make sure your cost, financing and ARV and rental calculations are all in a line before taking the plunge. But the numbers should still work even if you do overimprove just a tad, as long as the overimprovement is strategic, for a purpose, like getting better tenants or reducing the cost of maintenance or capital expense. My goal is always to come in under budget in most places so I CAN still afford a way to do one or two standout features that are likely to put my place at the top of my prospective tenants’ favorites— like granite (gotten at a deep discount) instead of Formica. Or a lot nicer lighting (bagged at a deep discount at my local Habitat Restore. Being a buy and hold investor, I also look for ways to lengthen the life of improvements like new flooring by putting in real hardwood that will last a lifetime. Is this over-Improving? Maybe, but I can count on lower cost of tenant turnover for the entire term of my investment, and that’s worth it..
    Jennifer Donley
    Replied 3 months ago
    I have BRRRR'd 4 properties so far. Something I didn't think about with the first one was incorporating loan fees and closing costs from the refi in my calculation. I got lucky and the property appraised for higher than I'd planned ( this has actually been the case on all 4 of them so far) so I was still able to walk out of closing with a check (not a big one but hey, it was still a check) and the property meets my cash flow criteria. But this is the first thing I tell people now when they're considering a BRRRR - analyze the full costs at refi if you want to get out with no cash out of pocket.
    Michael Casile
    Replied 3 months ago
    Chief of sinners though I be ... I am not a beginner, but I do tend to over-improve ... and I appreciate your driving this point home. I have recently retired from day-job (IT) and am improving on the rental business I developed during my IT career. With a partner, I own a mobile home park. We bought 8 of the units ... and found that over-improving was a huge problem there (building castles in the air since the basic trailer quality is not what normal stick-built home quality is). Anyway, I will keep your advice in mind. I completely agree with it ... hoping I can beat my instincts into shape.
    Alexander Felice Guy with Great Hair from Las Vegas, NV
    Replied 3 months ago
    Glad I could help You owe me 10% of the money saved ;) ;) ;)
    Mary White Rental Property Investor from Klamath Falls, OR
    Replied 3 months ago
    Good article and I agree that calculating ARV is critical. I pay frequent attention to the comp sales in my area. This really helps with my ARV knowledge. Being in a small town I ran into trouble in 2017 where my very nicely improved 4-plex came in $120,000 low on a appraisal because there weren't any nice multi-units recently sold. I'm refinancing it now because the market has finally caught up here. My improvements that were above others included LVP flooring and vinyl windows, nothing fancy, but in some markets, properties just aren't updated often.
    Terry Lowe
    Replied 3 months ago
    Always understand the area your rental is located. I rehab some units, where prices are going up, much differently than areas where it will be a while until there is any need to make a unit nicer. Still the mechanical, heating, electric need to be cared for the same on every unit.
    Chris Brall from Crown Point, Indiana
    Replied 3 months ago
    What about arv? Nicer home more arv? More on the refi check.
    Jace Perry Developer from Coeur d'Alene, ID
    Replied 3 months ago
    What tools can you use online to pull comps and market research other than depending on a realtor?
    Alexander Felice Guy with Great Hair from Las Vegas, NV
    Replied 3 months ago
    no online tool as of yet comes even close to understanding individual markets like the people who live in them. Realtors should know ARV comps Property managers should know rental comps
    Pablo Miguel Hernandez Rental Property Investor from Nashville, TN
    Replied 3 months ago
    Hey Alex - Thank you for this article. Very helpful, I'm in the midst of my 1st BRRRR project and currently deciding just how much I want to rehab the property. In regards to this advice - "Try to improve the property to the same level as the next closest neighbor—and no more than that. It’s one thing to provide a nice space for your guests, but you wouldn’t build a mansion in a trailer park right?" what if the property's next door have granite, wood floors, ceiling fans, etc. - would you recommend going with all of the above?
    Alexander Felice Guy with Great Hair from Las Vegas, NV
    Replied 3 months ago
    think of it this way. If that house goes on the market for rent at the same price as yours, and has all those amenities, which is the prospective tenant going to choose? if the house next door is worth $1200 in rent as it is, what's yours worth? If you want it to be worth in rent what the house next door is worth in rent, it has to look the same
    Gilbert Lugo from West Palm Beach, Florida
    Replied 3 months ago
    Can’t deny I was a bit guilty of the over-improvement syndrome and kind of falling in love with it but hey you live and thanks to that I’ve learned.
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied 3 months ago
    Great article! Over-improving properties is a very, very common mistake for rehabbers.
    Gregory Delmonico Rental Property Investor from Louisville, KY
    Replied 3 months ago
    It's as simple as this: You're selling a product, an apartment. How do you market a product that's exactly the same as the competition? What's your competitive advantage? What's your product differentiation? Why would a prospective tenant choose your apartment over the competition if it's the same? Lacking product differentiation leads to competing on price. It's certainly not a position you want to be in, as you don't know the competition's financial position on their property. What if they paid all cash for their property or if their property is paid off? They have the liberty to cut their requested rent amount to gain a tenant. By differentiating your product in the market, you create a "unique product" and can ask for a higher rent due to the differentiating features. For example, stainless steel appliances, washer/dryer in the apartment, or "wood-like" laminate floors.
    Wanda Wilkinson Real Estate Investor from Wichita, Kansas
    Replied about 2 months ago
    I am guilty of over-improving on rentals, and my partner (my brother) is too. The funny thing is that our biggest fights er-disagreements- were on what we thought was a valuable improvement. My brother wanted a custom privacy fence with custom gate. I thought he was crazy. I watched a lot of HGTV and INSISTED on removing the water heater and installing an outdoor tankless system for our 600 square ft house. I bought a $700 Koehler sink at the Habitat for Humanity Restore and talked my brother into installing it in one house. Anyway I am rambling. All of the improvements were appreciated by would-be renters and were commented on. The property managers got a crazy number of calls to see the places. We ended up with trendy millennials who wanted a place close to downtown. However, we spent a crazy amount of time on the places which I would not do again. My brother is very handy and he installed butcher block countertops from Lumber Liquidators on one house. I treated them with 3 coats of Waterlox.
    PETER PASQUALE
    Replied about 1 month ago
    Heres what we did. Shop shop shop. Ask everyone who they buy from. We found real WOOD cabinets dirt cheap and after 2 + years they are holding up well. We found quartz cheap too - by shopping around. Plus when I go in a store, I say show me the stuff that is 99 cents a square foot first, then I work UP from there. Shoot for stuff thats timeless and classic. Our tile, for example, which I've seen in some expensive homes was $2.99 a square foot. Price + Style + Decent quality. You can have it all. We have a caviar WOW factor in our rental, but we did it for close to McDonalds pricing. As far as workers, ask all your hispanic friends who they use. Some of the friends you can use and some you can't - but one of those friends will have the contractors license needed for the job. Every one of our hispanic workers has been hard working, honest and exceptional. I can't speak highly enough of our hispanic contact network.