As a real estate investor with rental properties in your portfolio, you may occasionally run across situations where you believe a renovation or remodel is in order. But before you dive in head first, it’s important that you know what’s in store.
4 Rental Renovation Tips
Every remodeling project requires forethought and planning. But it’s especially important to do your due diligence when it comes to remodeling an investment property that you’re renting out to produce residual income.
As you prepare to renovate or remodel your property, you’ll find it helpful to consider the following tips and suggestions.
1. Weigh Needs vs. Wants
The first thing to consider is whether you actually need to renovate the property. Believe it or not, it might not be necessary.
If you’re like most casual investors, you own rental properties in low-income or middle-class neighborhoods. Thus, your target renter is someone who has modest earnings and expectations to match.
You don’t need marble floors and top-of-the-line kitchen appliances to keep your property rented. You simply need quality accommodations that are safe, healthy, and functional.
If you provide these things—and price your property appropriately—you’ll always have a pool of potential renters.
As you consider a renovation, ask yourself whether these updates are needs or wants. If they fall into the latter category, think about the potential return on investment—or lack thereof. If, for example, you spend $3,500 to upgrade kitchen counters from laminate to quartz, will you ever get that money back?
If you can’t definitively say yes, you probably don’t need to upgrade. But if you’ve studied other comparable listings in the area and see that a cosmetic kitchen upgrade is the only thing keeping you from raising rents by $300 per month, then maybe you should. After all, it would only take you a year to break even.
2. Consider the Impact of Lost Rent
Think about the timeframe of the renovation project. How long will it prevent you from collecting rent? Is it something that can be done in a week or two, or will the project require a few months to complete?
Time is money. So when it comes to renovations, you may not be able to afford a lengthy one. Crunch the numbers and figure out a timeline. (Be sure to account for delays, and create some buffer in the schedule.)
3. Figure Out Financing
If you aren’t paying for the renovation in cash, financing is one of the first things to figure out. Go ahead and shore up your financial situation to increase your chances of having a loan application accepted.
“Your credit score is a big deal. It’s shorthand for how much you can be trusted with money,” CardGuru explains. “It’s based on all your debts throughout your life, from bills to credit card balances to car payments.”
If you have a poor credit score, it may be wise to wait a few months and beef it up a bit.
4. Use the Right Contractors
Finding the right contractor to complete the renovation is not a matter to take lightly. The right contractor will do the job right, complete it on time, and come in on—if not under—budget.
Start by creating a list of potential contractors. Tap into the networks of friends, family members, and real estate professionals to get in touch with good ones. Based on interviews and face-to-face meetings, whittle your list down to three options and ask for bids.
“To compare bids, ask everyone to break down the cost of materials, labor, profit margins, and other expenses,” This Old House advises. “Generally materials account for 40 percent of the total cost; the rest covers overhead and the typical profit margin, which is 15 to 20 percent.”
Based on the bid, your level of comfort with the contractor, and other factors like reviews, licensure, and experience, select one and get started.
Adding It All Up
Every renovation or remodel is different. Some are extensive and require you to be there every step of the way. Others are so small that they can be managed remotely without much issue.
But whatever the case may be, it’s important to think through the factors above and come up with a plan that lowers risk and maximizes your return on investment.
Any additional tips you have that I may have missed? What renovations are you considering? Have you done the math?
Let’s talk in the comment section.