Target rent increase from unit upgrades?

6 Replies

Please forgive me if I have overlooked a similiar discussion. I had difficulty finding anything on the subject (could be caused by my novice ability to navigate the site).

I am currently researching local properties in the hopes of buying my first rental investment with some slight "deferred maintenance."

My question is, how do you decide how much to fix/upgrade, given the added rent it will bring? Is there a general rule to shoot for? For example, for every $2k of upgrades, you should get $50 in added rent, or you should be able to recoup your upgrade cost in 1 year of increased rent.

I may not be clear with my true question, but I am having trouble figuring out how to decide what upgrades are worth it. Obviously those that are needed to stay competitive are a little easier to decide, but I'm looking more at upgrading appliances or countertops etc.

It may be that there is not a rule of thumb, and this is more of an "art" or skill in investing that will come through time. I was just hoping to avoid making costly upgrades that yield little in increase rents just because I thougth it made the place "look a little better."

Thank you for any help! And again I am sorry if this topic has been discussed before, please point me in that direction if that is the case.

You really just need to look at comps in your area. You could spend thousands upgrading an apartment with ceramic tile, hardwood, lighting, etc... At the end of the day if the market for that unit (let's say a 2 BR) is only $950 then you aren't going to get more than $950/month. You could very likely get the same $950 if you had vinyl and laminate flooring and off the shelf home depot lighting. There is no real correlation between the $ value of the upgrades and the increased rent. It's a relative situation depending on your market. Check out your competition. What are you seeing rents advertised for? There will be a top of the market and that is for the nicest side of town with off street parking, etc... There is a middle ground obviously and the slums. Where your property fits in determines your finishes. It is what it is sometimes. Freshly painted, bright units with carpet and vinyl show better than a unit with hardwood but dirty walls and dented doors and the like. 

Good question. Here's what I do ... if you have an outdated but clean & basic rental, you can get market or slightly below market rent. If you have an updated and nicer rental, you can get market or slightly above market rent. Where do I get my rental comps? From the MLS. You can also look at Cragislist, Zillow and the like if you do not have real rental comps...but nothing beats data from the MLS.

The trick is to just buy your rental property cheap enough, that even after upgrades, it'll cashflow well. My favorite rule is the 2% rule...you should get at minimum 2% of your basis back per month in rent, not factoring in any leverage. So if you have a house that cost you $50k you should get at least $1000 a month in rent. It IS hard to do that in many regions of the United States - but in DFW its very doable

@Steven G.

Genuinely curious where you are finding houses in DFW for 2% price to rent, that are not in a war zone. Even 1.2% is tough in desireable areas

@Steven G. I would like to know as well. The best I have found is around 1% and just slightly over. I remember somewhere on one of the podcasts someone mentioned they were getting 2% without much rennovation. I want to say milwaukee, but could be very wrong.

Thanks for the run down, that makes sense. I think I was trying to make it too complicated. I am still wondering if there is any metric to indicate the improvement/renovation is a good idea (ie $300 of renovations will be recouped in 6 months due to the $50 increase in rents, and anything over 6 months is probably not worth the expenditure)?  A general rule/target similiar to the seemingly accepted goal of cashflowing $100 a door.

You will not find these deals in upper middle income or upper income areas, which are better for retail rehabs OR leveraged rentals. I don't know the Atlanta market, David, but I do know the Dallas market (this will probably be helpful for Dmitri L). 2nd note; I do 65% of my deals in Dallas county, and the rest in Denton, Tarrant & Collin, and other counties so my example cities will be primarily in Dallas county. All the cities below, I've personally bought deals in that would meet or beat the 2% rule.

Where you will rarely if ever find these deals
- Most suburbs north of 635; Plano, Frisco, McKinney, etc; again those areas are better for doing retail rehabs OR leveraged rentals
- Also, any "newer" area with homes over $100k will rarely be viable for these deals

Where you can find them fairly easily; these deals are usually NOT found on the MLS; they tend to be lower middle class and older middle class areas
- Older parts of Grand Prairie, Irving & Arlington (central DFW)
- Older parts of Mesquite (eg W of 635) and Garland
- Older parts of Forney
- Other suburbs; Everman, White Settlement, Burleson, Waxahachie and many more that are not too far out (I'd say Greenville, Sherman/Denison, etc would count, but they are not really part of the Metroplex so I do not factor those into the equation)

Working class neighborhoods / urban areas in Dallas or Fort Worth; these deals can sometimes be found on the MLS, but the best deals are off-MLS deals

- Pleasant Grove
- South Oak Cliff
- Various spots around Dallas
 

Where you can find them all day long; these are areas you might call war zones...but I call them areas "that are improving" ;)
- Fair Park
- West Dallas

Hopefully that helps!

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