trying to BRRRR - But what improvements add value???

Question

Hi BP!I'm closing on my first deal in cash and I want to refinance and pull my cash out after 6 months. My question is:  What can i put into the house to add value so it appraises for more money and I can get ALL my money back? Acquisition: 109kCurrently appraised at: 110K

Money to use for improvements: 50k

Andrew Syrios · Answer

Here's an article I wrote on the best value-add improvements to make: https://www.biggerpockets.com/blog/7-creative-ways-add-bedroomsbathrooms-value-add-amenities-house/ and here are my recommendations on what you generally shouldn't make: https://www.biggerpockets.com/blog/rental-property-add-ons. I hope those help.

Peter Hanson · Answer

CA appraiser here. I can give you some direction.  If you have a small rehab budget spend your money on paint, granite counters, improving curb appeal, kitchen upgrades, new vinyl or tile floors, and bathroom upgrades to get quick visual improvements. This will get you some minimal appreciation and make your units more attractive to tenants.

If you have a larger rehab budget, the total best bang for your buck is to add a 1/2 bath or a full bath and/or turn a 2 bedroom house into a 3  bedroom house. My favorite thing to do is to turn a 1 bed/1 bath into a 2/1 or 3/1 or turn a 2/1 into a 3/2. You see SIGNIFICANT increases in value when you do these things. Some can be done cheaply like sectioning off part of a large living room or family room and creating another bedroom. Do everything with permits!  As long as the square footage of the home matches tax records and there are no "unpermitted" additions you should get value for all the bedrooms and bathrooms that are present in the home.  If you can add a bathroom for $7,500 you might get $15,000-$50,000 in value appreciation in the better areas (example: take a house from a 2/1 to a 2/2 )  If you can frame and drywall a 3rd bedroom for $10,000 you might get $20,000-$60,000+ in value.

A few recent examples that I did. I purchased a 600 SF 1/1 for $129,000. I framed in the dining area and built a closet for $10,000 making it a 2/1. 6 months later I had it appraised for $190,000 and I get $150 more per month in rent due to the 2nd bedroom.  I also purchased a 1400 SF 2/1 for $510,000 and spent $80,000 remodeling it and making it a 3/2. 5 months later after it was all rehabbed I sold it for $759,000. Making the house a 3/2 increased the value by almost $250,000 which is almost 50% of what I paid for the house.

Jen R. · Answer

Can’t give specific advice without knowing your market, so that’s your first step: check out your comps. One of the difficult parts of the BRRRR strategy is maximizing the appraisal value while not over-improving your rental. So, you will need to determine a couple of things: first, what is your desired ARV? Then, look at the sold comps in that price range and see what it’s going to take to hit that number (as well as properties currently on the market, as those may be the comps your appraiser will be using in 6 months). I always try to be conservative here, because I’ve found that without a sales contract in place, appraisers tend to value homes a bit on the lower side.

Next, what kind of rent are you hoping to get? Check out other rental properties in that price range and pay attention to the finish level and how quickly they get leased.

Then you will have to make some compromises in order to find the sweet spot for your renovation costs. Personally, I like the strategy of finding space to add another bedroom and/or bathroom in order to drive up both the appraisal value and the rent. I love buying a 2/1 or 3/1 and turning it into a 3/2. Also, make sure you focus on any mechanicals that need to be updated. You may not see much return on the appraisal, but best to take care of those issues up front while the house is vacant and easy to tear apart and put back together.

Lastly, focus on your cosmetics in order to hit the rental price you need. It’s easy to overspend here. I typically try to improve just beyond what the other rentals in my area are offering. I want to have the nicest rental on the market, which means I have close to zero vacancy costs. When choosing finishes, you’ll also need to take into account durability and weigh that against the price. For example, I don’t do any carpet in my rentals, which makes for a higher up front cost, but saves me $$ in the long term.

The forums are great for advice on cost-effective but durable finishes for rentals. Also, if you post some pics of your property and the location, you may get some locals who know your market to chime in and offer suggestions based on their experience.

Jaron Walling · Answer

Purchase price: $109k, ARV: $120k... how do I pull all my money out?!

In all seriousness the only thing that matters kitchens, bathrooms, HVAC, then everything else. Replacing the roof returns about 70 cents on the dollar. The most important part is never over renovate. Compare your upgrades with other properties. Are granite counter tops necessary? Do you need can lighting in every room? Tile or laminate flooring? Let the market steer your budget but remember it's a rental.

Mike McCarthy · Answer

Look at the comps! You’re shooting for an ARV of $200-215K (assuming a 20-25% down payment when you refi). What’s in the neighborhood that is selling for that range? Can you attain it with $50K in Reno?

Don’t feel bad, it’s hard to get all your money back in the BRRRR strategy unless you’re buying at significantly below market value. But your goal should be maximizing the ARV and the other posters have you good ideas!

Look at it from the appraiser’s standpoint. What changed to increase the value $80K? Granite countertops help, but they know they aren’t worth 10K :)

Good luck!

Aaron K. · Answer

Nothing will give you a $1 for $1 return on its own the only way you can get something like that is if the property was in rough enough shape to be flippable.  If it is relatively good as is and you are planning on doing tweaks, any gain will be primarily differences in appraisers.

trying to BRRRR - But what improvements add value???

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