Choosing what to include and what not to include on a scope of work is just as important as picking the right contractor. Some work is obviously necessary (say, repainting a tired house), while other upgrades are more elective. And when it comes to elective work, there are some improvements that are worth the bang for your buck and there are others that most certainly are not.
Here are the key things to add to your “Thou Shalt Not” list when it comes to rehabbing investment properties.
1. Repairs That Are Generally a Poor Return on Investment
In 2003, the National Association of Realtors came out with a study on the characteristics that increase and decrease the price of new housing (assuming all other characteristics, i.e. square footage, remain the same). Here is what it found:
- Full Bathroom: 23% increase
- Partial Bathroom: 15% increase
- Garage: 13% increase
- Central Air Conditioning: 12% increase
- Fireplace: 12% increase
- Basement: 9% increase
- Close to Golf Course: 8% increase
- Higher Ceilings (9 Feet): 6% increase
- Additional Bedroom: 4% increase
- Laundry: 2% increase
- Above-Ground Swimming Pool: 0% increase
- In-Law Suite: 5% decrease
- Professional Office: 5% decrease
The fireplace one sounds hard for me to believe, but the others mostly seem reasonable. Some of these characteristics are obviously going to have different effects in different areas as well. So, for example, a garage in a city that has a high walk score is probably not as valuable as in a city that has a low walk score. A basement in an area with a high water table that would often flood isn’t going to be particularly desirable. Central A/C is going to much more valuable in a place like Birmingham, Alabama than in San Diego, California.
That being said, some renovations are almost always a bad idea. In-law suites and professional offices would be two of those. Another is converting a garage into a bedroom. CostAdvisor.com puts the cost of an average garage conversion nationwide at $11,154. I think that’s high, but it still costs quite a bit (especially to do it right, as many garages are not insulated, for example). The problem is that you are losing something (a garage) at quite the price in order to just get another bedroom. While adding a bedroom to go from one bedroom to two or from two to three (usually the smallest a family would consider) may be worth it. It is rarely worth it to do so above three bedrooms unless the house is very large.
Related: The Top 5 Items to Replace or Upgrade in Every Rental Property You Buy
Like with most things, there are some exceptions. Most notably is student housing, which is rented out by the bedroom. In that case, the more bedrooms, the higher your rent. So finding any nook and cranny you can to turn into a bedroom makes sense. But in general, adding bedrooms beyond three isn’t worth the cost.
2. Fixing a Property Up Too Nicely
Another common mistake investors make is fixing up a property too much. If you’re fixing up a luxury house to flip, then you need to go all out. But most rentals, particularly working and middle class rentals, don’t need anything near that. They need to be nice and functional, not spectacular. Of course, it’s important not to use crummy materials. Builder’s grade carpet will rarely last more than one turn, and good luck getting any mark off if you use flat paint. But you also don’t need to go all out with things like:
- High-end stainless steel appliances
- Custom cabinets
- Granite slab counter tops
- Bay windows
- Elaborate crown molding
- Expensive chandeliers
My brother has a saying that he buys the second cheapest item a store has. His theory is the that the cheapest is junk, but the second cheapest (err, least expensive) is at least solid even if it’s not fancy. I would not embrace this theory fully, but it’s a good place to start. High-end materials won’t add much rental or resale value to a middle-of-the-line property. They’re just not worth the costs. But cheap materials will quickly break and need replaced. Cheap materials are also, in a different way, not worth the cost. Aim for the “Goldilocks zone.”
3. Awkward Additions or Upgrades That Don’t Fit the Property
I’ve seen some weird repairs in my day. (Just check out my list of top 10 DIY catastrophes for proof of that.) For the most part, it’s probably best to avoid adding additions to a house in general. It’s also rarely worth finishing a basement. I’ve lost track of how many “finished” basements I’ve walked into that were full of mold or the bottom half of the drywall was torn out because of flooding problems. That being said, if you do go either route, make sure to get it permitted and use a respectable contractor.
Other upgrades may appear on the surface to be worthwhile, but really aren’t. I’ve seen a good number of “additional bedrooms” that are only accessible through another bedroom. This doesn’t count (legally or otherwise) as a bedroom, folks. Some additional bedrooms are so small that no serious person would consider it one. (A bedroom should be at least 100 square feet.) Counting these rooms as “bedrooms” often just disappoints potential buyers or renters when they actually see it and reduces your chances of getting it rented or sold.
You should also ask yourself, “What would I want if I lived here?” So, for example, if you have a big, multi-story house with no downstairs bathroom, adding a half bathroom is almost certainly something you would want. Who wants to have to go upstairs every single time nature calls? On the other hand, if you have a multi-story house where every bedroom is upstairs and it has a half bathroom downstairs, you may be tempted to make that half bathroom a full bathroom. But why? People generally aren’t going to take a shower on a different floor than their bedroom unless they have to.
If a house has a dingy basement and that’s where the laundry is, it’s probably worth trying to bring that laundry upstairs. If it has a dry, finished basement, it’s probably OK to keep it in the basement. Again, I’m not a fan of garage conversions, but if you are considering one, you should think about whether the house would still have any storage. If the house has no basement or shed, converting the garage pretty much eliminates whatever storage the house once had. People have a lot of stuff these days and need somewhere to put it.
Related: 7 Ways to Spend a $5,000 Renovation Budget for Max ROI
So make sure to ask yourself these questions and put together a scope of work based on the answers.
4. Upgrades That Are Mostly Just a Headache
Some items are nice, but are usually just a headache, especially for rentals. Skylights look nice, but they are notorious for leaking when it rains. I would not recommend putting them in unless you’re dealing with a luxury property. Swimming pools also generally fall in that category.
As noted above, the National Association of Realtor’s study found that adding a pool adds a whopping zero percent to the sales price. And pools aren’t cheap to add. CostAdvisor.com (which, again, I think is high) puts the national average at $49,500! In addition, if you’re renting out the property, there are a lot of arduous laws and liability issues regarding swimming pools these days.
That being said, there are some exceptions, of course. When I was in Scottsdale a while back, literally every single house had a swimming pool. Sometimes, clientele of a particular area expects to have one. In those cases, it makes sense to put one in, but it usually doesn’t.
You may make your money when you buy, but you can lose it at any stage of the process. And the most common place I see investors turn a good deal into a bad one is with a botched rehab. Finding good contractors and managing them well is essential. But it’s also essential to put together a good scope of work. And a good scope of work is good for not just what it has in it, but for what it leaves out.
What would you add to this list? Do you disagree with any of the above?