To improve or not to improve... that is the question

6 Replies

Hi all -

I am looking for some guidance on evaluating the value of improvements to a duplex I recently aquired. Not sure what metric I should be using to evaluate this opportunity.

The situation is that I have a duplex which is occupied with inherited tenants at a below market rent. The other side is empty and I have spent about 5K improvements which has allowed me to raise the rent for that side by $125/month.  Now I am wondering if it makes sense to improve the currently occupied side when the tenant's lease is up.

So the question I am trying to answer is, should I invest an additional 5K to raise rent by 125/month or is it better to leave it as is?

Here are my numbers:

Current rent: $525

Improvement cost: $5000

New rent: $700

My initial thought was to do a simple ROI calculation ($125/$5000) but I feel like there is something missing.

What metric should I use to evaluat this opportunity? Would I measure this over 1 yr or what time period should I be using?

Thanks in advance.

I use a pay back on investment of 2 years. In your case it appears the rent increase is $175 not the $125 you have stated. At $175 that is a pay back of 29 months. Close enough.

If the $5000 is financed that is the best senerio.

I don't prefer payback method as a financial metric. Return on investment is much better in my opinion. when doing this you take your monthly return $125, multiplied by 12, $1500. This is your yearly return. Divide by investment, $5000. 30% yearly return on your money. If you invested $5000 in the stock market and made 30% wouldn't you be pretty goddamn happy???

Yep, I like 2 year pay-backs on upgrades but will go as far out as 4.  25%/yr and improving your property is still outstanding!

A home run for instance is providing used washer/dryers 'on loan' when my townhomes turn over yields an amazing ROI. I'll be all-in for about $100 and get to raise rent for the new person $40/mo, from $900 to $940. Plus I control the washer hoses (brand new braided stainless to prevent flooding) and how they are installed (not slid across my floors). People really abhor the idea of spending their Saturday in a laundromat. Plus I don't have to fix them! They are 'on loan'.

Another good return I have discovered is removing the carpet and pad and installing laminate in the living rooms.  For $400 installing it with my sons, we can raise rents $150/mo.  Of course I paint the walls and trim a nice color while I'm there.  That's where my $9 mistint paint comes in handy. I can do it in 2 1/2 days total now that I've done it 7 times.  Good time to listen to podcasts!

Some things you improve just to improve the look of your property and your tenant pool, like siding and landscaping. There are intangibles that aren't so ROI black and white. I shoot for b class tenants.

I don't know if I've ever put $5k into one unit, though.  But I am a DIY tightwad.  What are you doing and are you doing it yourself @Brad E. ?      

@Thomas S. - good catch I did fat finger the rental increase, it is $175.  The 5K is on a credit card with 0% interest for 12 months.  Why do you use 2 years?

@Andrew Boettcher - yes I do like that return :)  However, I started wondering if that was painting an accurate picture.  I have been studying up on investment metrics and have recently been learning about using NPV to compare investments.  So I was thinking I should be using a different metric to show a more accurate picture of apples:apples comparison. Of course I know just enough to be dangerous at this point.

@Steve Vaughan - its been mostly cosmetic stuff - paint, floor, counter tops plus a couple things to the exterior.  I'm all about DIY but realized I dont have enough time with my other commitments to get the work done this century.

Others have covered the financials better than I could, but I think it's also a good idea for community reasons. Keeping the two halves in sync helps in few ways. First, you're going to have a consistent tenant quality on your property - people at different income levels and life stages behave differently which has the potential to increase strife in close quarters. Second, you don't want rental quality/price differences to cause friction. If you're getting the same rent for the property, the new renter is going to be resentful their place isn't as nice. If you're not getting the same rent, the renter in the nicer half is likely going to be resentful that their rent is higher (they know their place is nicer, but that doesn't mitigate the "I'm getting screwed on price" visceral reaction. 

Best to be consistent across the property on turnover I think!

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