How long to get a return on remodel for a rental?

7 Replies

First post!  Hello BP!

Sorry for the noob question but I can't seem to string together the right search terms to get the answer I am looking for.

Here is the question...followed by the backstory.

When investing in upgrades for a rental, in what amount of time do you guys expect to recoup your costs (understanding that after that point, the forced rental appreciation is all profit assuming the upgrades do not lose value)?

Backstory: 

I have a rental (2+2) condo in Century City (Los Angeles) which is a relatively high-end rental market.  Maybe I've been watching too much HGTV but I would like to remodel the kitchen, bathrooms, and put in hardwood (engineered) floors and new appliances.  The decor currently is late 80's and Berber carpet.  As is, I know I can rent it for $2800-3000.  I am hoping to push the rent up to $3300-3500.  What time horizon do you guys use to determine the value of the upgrade...i.e. if I spent $15,000 but was able to push the rent up $500, then I could recoup my costs in 2.5 years and assuming I didn't have to do any more upgrades for the next 10 years, I would pull in an extra $45,000 in rent over that time.  To me, it seems that for upgrades that will last about 10 years...I should be willing to breakeven at 3-4 years?  What do you guys think?

Also, I'm thinking of hiring a designer to help with the project...am I wasting my money?  I have two kids (including a young baby) at home and just don't have time to learn/research this stuff right now...wish my tenants were moving out in a  year!  I guess life waits for no man.

Thanks!

Roy 

Originally posted by @Roy Kwak :

First post!  Hello BP!

Welcome to BP!  I personally like to see my money back in 2-3 years, but it also depends on the market.  From what I understand in Century City, a $15k upgrade like that could yield a $30k + increase in value.   If that is the case I would be willing to do a 5 year payback.  

Medium second city real estate logo   white close upBrie Schmidt, Second City Real Estate | [email protected] | http://www.SecondCity-RE.com | IL Agent # 471.018287, WI Agent # 57846-90 | Podcast Guest on Show #132

Thanks Brie! good to know that I am not completely off the mark. Do you formally calculate a ROI based on how long you think the upgrades will remain useful?

I dont look at how the cashlow directly pays for the improvements. I look at what the improvements will do to create new property value so i can refinance the property and pull out my capital used to make the improvements.

Frank

If I can force equity and attract a high quality renter then I'm willing to spend some money.  As long as I get that money back in a few years.  But, when I buy I'm planning on long term hold.  

Frank - I guess obvious to you but something I wasn't really thinking about since I am still new to this (forced equity then pulling it out through a refi).  Brilliant!

Bryan - good point about improved tenant quality...I was so focused on just increasing rent down the road.  Better tenants would of course help me out tremendously...and make me a better neighbor to the building.

Thanks guys!

So I guess, if I'm trying to decide about how much money to throw at the place (i.e. a 3 year breakeven or a 5 year breakeven)...I pretty much have to just do enough to get the job "done" (i.e. get the result that will get the rent and appreciation that I want...which is admittedly hard to exactly predict without a lot of experience)?

@Roy Kwak

Hi Roy,

Great to see you on BP and congrats on your first post! 

Here is what I would consider:

1. I see that you are "hoping" to get $3300-3500 once the remodel is done. You should be sure that this is reasonable given the area. Check multiple sources (Craigslist, Postlets, realtors, etc) for listings and confirm that others are asking and getting comparable rent for your projected type of rental product.

2. I agree with @Frank Romine about forcing improved equity. As a new RE investor you will see a much faster net worth increase if you leverage the new equity you create to acquire more RE, versus waiting for cash flow to recoup your costs. Consider using the additional rental income to support a cash-out refi.

3. Go with a proven designer with a proven track record. When you are transitioning between tenants, vacancy is very expensive and getting the unit turned over quickly will be worth the money you spend on the designer. 

Phil