rent premium for luxury feel

2 Replies

I've been trying to wrap my head around rental price differences and what determines the price, since not all comparables are... comparable. How do you guys decide when it's worth it to put granite countertops in the kitchen and when it simply won't pay off for the rentals?

For example, I recently had a wholesaler show me a property where dated comparables fetched $1200 rent, yet updating the kitchen and baths would bring the rent up to $1400 based on other comparables he showed. This was a typical 3/2/2 property in Texas, otherwise. I was shocked by this, would people actually pay such difference?

I've looked at another property, in what seemed like a better neighborhood (similar school reviews, much lower crime, based on my research I'd actually say this is a more desirable place), that initially looked like it had more meat on the bone, but my property manager said otherwise. It was a dated 3/1.5/1 with more square footage and he suggested not to even bother with the rehab if I was to buy it since I would be unlikely to get more than $1100 for it, regardless of cabinetry. He did mention that what limited this property is the half-bath and a 1-car garage, but I don't understand why the same luxury premium wouldn't apply to this house if it's in pristine condition. I also don't understand why the house gets such a severe penalty for not fitting a second car in a garage in Texas (where it barely snows) and only having a half-bath (it's usually not the shower/tub that two people need to use at once).

How do you decide when updating the kitchen/bath is worth it and when it isn't? At first I thought it was all dependent on neighborhood (B- or above = granite), but apparently that's not the case. How do you judge what kind of premium the updates would bring? Is it a gut feel from experience or is there a formula to it? Is it the fact that 2nd house is already at a disadvantage by not being the standard cookie-cutter 3/2/2 build? Do you recommend staying away from irregular builds altogether since they diminish the effect of luxury improvements? Do you find that despite the lower price, the tenants still treat the property better, reducing repair costs?

I would suggest doing a walkthrough of comparable rentals within a one mile radius. That should give you a hands-on feel for what is being offered in terms of finish and amenities for a given price point in your area of interest and you can then take it from there.

Alex, think about it this way.. not only could updates bring a higher rent, but also reduce your vacancy rate by creating a highly desirable rental. Also, I'm a huge fan of bringing consistent quality products to market,building a brand and reputation around this, which ultimately pays of 5 fold. I think you have the right idea by pinpointing the kitchen and bath because these are emotional triggers that renters and homebuyers are willing to pay for. You want to be cognizant of keeping your buyer/rental pool as large as possible (not too specialized, such as irregular floor plans) and be sure to not cripple yourself by over-spending on your upgrades.

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