We're considering purchasing a SFR for a rental and trying to decide about rehab, so I thought maybe talking it through on here would help. We told ourselves that we weren't going to buy any more houses until next year, but...
So basically the question is, do we do the minimum rehab and get a tenant in right away, with plans to do a major reno sometime in the future, or do we go all in and make it nice right away?
- Paying cash, so holding costs will be very low
- Roof, siding, plumbing & mechanicals are new or nearly new
- Home is in rentable condition, but not up to our usual standard
- Our current rehab project will have us fully occupied at least through the end of the year.
If we go with option 1 the house is unlikely to appeal to a more desirable tenant, but option 2 will not get us much more rent. Option 1 could have it ready to rent in 1-2 weeks after closing, so as early as mid Dec. Option 2 will take at least 3 months once we get started, which would mean late Mar/early Apr.
The problem areas are the kitchen and bath. The bath is very small, with no tub, only a stall shower, and yes, it's the only bath. It will take a great deal of creativity to find the space for a tub, but that's what we'd like to do.
The kitchen will be okay if we replace the countertop, but it really needs to be redone completely. The layout is terrible, and the cabinets, though in good shape, are ancient. They were made of plywood from a local lumber company that closed down in the late 50's!
I really hate the "It's good enough for a rental" mentality, and I don't really want to deal with the quality of tenants that are satisfied with that type of house, but we can only take on so many projects, and may be worn out when we finish the current one.
I know my preference would be to rehab to my standards first. However, you need to compare the risk/return. You risk the wrong type of tenant w/out the rehab. That exposes you to possible lost rents & damage to property. You have to compare that to the risk of holding costs for a non-cash flowing property & opportunity costs for that money invested not performing elsewhere during that time. Sorry I'm not more helpful, but I think you already know which way you're leaning. :)
This is a very complicated question. Your long-term strategy, assets, portfolio, market review, your connections, etc. etc. should all factor into your decision.
But, assuming that you are in it for the long-haul and are seeking modest cash flow to fund a retirement in the nest 5-10 years... I would leave it as-is.
In my experience, the best return on rental income rehab is to bringing the house to to just below the neighborhood average condition on most things (but fully functional), and then doing the standard paint/carpet. Once you get into cabinets and bathrooms, or 3-month rehabs, the math will likely fall apart on the upgrades.
I think this for a few reasons. First - one of the best thing that we can have as real estate investors is choices/options, which is functionally capital. The second is that the repairs would probably make more sense to do in 3 years rather than today. Or in 5 years rather than 3. Or 10 rather than 5. You get the idea. :)
If you're willing to leave a little money on the table, and prefer the process of owning upper-end rentals, I think that you can justify that route. But from a pure investor perspective, I think that leaving things clean and functional (even if they are dated) is almost always preferable.
For 4 years I have regretted not buying a house that was super cheap and near my other rentals, but below my rental standards. I was way too busy to fix it up then, and knew I could rent it out cheaper until I could get around to it. Even at that time I knew that once I had the time for that kind of project, there wouldn't be any of those kind of deals left. I wish I had that house now, and as soon as it went vacant I would fix it up the way I wanted it. That said, I would get the house now and rent it out quick. Come back to it when you have time and rest easy knowing the house is yours!
Also remember that this is a rental and not your personal house. We OVER improved our first house. Personally I would buy it rent it out, and than fix it up when you have down time or a natural gap between tenants.
Don't over-improve :)
@Ben Leybovich @Elizabeth C. Yes, over-improving is a real risk. It's sometimes hard to know where the line between nice and too nice actually is.
@Mark Freeman I hear you. This one isn't cheap, but it's reasonable, and in a good location.
@Jeremiah B. Your first paragraph sums it up quite nicely. One issue is that we have the money now, but the situation may be very different in 3-5 years. Yes, we could set aside the money now and do the project then, but deferred projects often never get done.
@Jennifer Bennett Yes, I know which way I'm leaning, I'm just not sure it's the smart way! ;-)
Thank you all for your responses. Not knowing how to spend the money you have is definitely preferable to not having the money you need!
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