Upgrades in rental properties
Warren, MI · Member since 2015 · 140 posts · 36 votes
I have a client, that is a newer landlord, that likes to put up fake ads on craigslist a week apart, with and without mentioning an upgrade she is considering ("Pending prior to your move-in: new xyz counter tops"), as well as with or without the rent increase she feels the upgrade will justify, to test the waters before spending any money. Market value is what someone is willing to pay, so why not just go ask some people if they'd be willing to pay your price?
Incidentally, it's not super hard to calculate what works out to be a marginal capitalization rate. I don't think "marginal capitalization rate" is in the standard BP vocabulary, but I believe it should be.
[ monthly rent hike * 11 / cost of upgrade ]
If you do this work in between tenants, it will not impact vacancy and should have no (or a positive) impact on maintenance expenses and carrying costs, so you can just do the super simple calculation above. Multiply by 11 to assume one month of vacancy per year, which is conservative.
$3000 in kitchen work, and an afternoon of your elbow grease that would otherwise have been spent doing non-income-generating activities, to turn a neglected kitchen into an amazing gorgeous kitchen, to bump rent by $50/month?
$50 * 11 / $3000 = 18% cap.
Would you buy a home with a 18% cap? Hell yes you would. I'll buy anything with a guaranteed ROI of 18% all day, every day.
Why are many landlords hesitant to calculate marginal cap on upgrades? Unclear to me.
Why don't contractors run around pitching to landlords based on marginal cap rate? Hell if I know.
If you want to think like a hard money lender, you are "lending" this home $3,000 at 18%, interest only, with a balloon payment due on sale. If you hold the home for at least 6 years, it'll have paid for itself and it made sense even if the $3,000 upgrade didn't increase sales price (your "balloon payment" that the house owes you) by a single penny. IRL hard money lenders and credit card companies have a hard time finding people or things that will accept an 18% interest rate, and actually pay that 18%, reliably.
Obviously you will not be disclosing that you're getting 18% ROI on that kitchen to that tenant, and many tenants can't do math anyways or they would be homeowners, so there ya go - someone paying you 18% that doesn't even realize it and might even be grateful for the new kitchen.
Clearly I need to go get into the business of selling kitchen upgrades to landlords, because re-reading that above, apparently I know how to pitch kitchen upgrades that I know literally nothing about... ha.
An appraiser answering this question would likely say something about how it's local to your market. A great heating system is going to go a lot farther for you out in Michigan than it would here in California, and similarly something in the kitchen making it vegan friendly will likely go farther here than it would for you.
I have a client, that is a newer landlord, that likes to put up fake ads on craigslist a week apart, with and without mentioning an upgrade she is considering ("Pending prior to your move-in: new xyz counter tops"), as well as with or without the rent increase she feels the upgrade will justify, to test the waters before spending any money. Market value is what someone is willing to pay, so why not just go ask some people if they'd be willing to pay your price?
Incidentally, it's not super hard to calculate what works out to be a marginal capitalization rate. I don't think "marginal capitalization rate" is in the standard BP vocabulary, but I believe it should be.
[ monthly rent hike * 11 / cost of upgrade ]
If you do this work in between tenants, it will not impact vacancy and should have no (or a positive) impact on maintenance expenses and carrying costs, so you can just do the super simple calculation above. Multiply by 11 to assume one month of vacancy per year, which is conservative.
$3000 in kitchen work, and an afternoon of your elbow grease that would otherwise have been spent doing non-income-generating activities, to turn a neglected kitchen into an amazing gorgeous kitchen, to bump rent by $50/month?
$50 * 11 / $3000 = 18% cap.
Would you buy a home with a 18% cap? Hell yes you would. I'll buy anything with a guaranteed ROI of 18% all day, every day.
Why are many landlords hesitant to calculate marginal cap on upgrades? Unclear to me.
Why don't contractors run around pitching to landlords based on marginal cap rate? Hell if I know.
If you want to think like a hard money lender, you are "lending" this home $3,000 at 18%, interest only, with a balloon payment due on sale. If you hold the home for at least 6 years, it'll have paid for itself and it made sense even if the $3,000 upgrade didn't increase sales price (your "balloon payment" that the house owes you) by a single penny. IRL hard money lenders and credit card companies have a hard time finding people or things that will accept an 18% interest rate, and actually pay that 18%, reliably.
Obviously you will not be disclosing that you're getting 18% ROI on that kitchen to that tenant, and many tenants can't do math anyways or they would be homeowners, so there ya go - someone paying you 18% that doesn't even realize it and might even be grateful for the new kitchen.
Clearly I need to go get into the business of selling kitchen upgrades to landlords, because re-reading that above, apparently I know how to pitch kitchen upgrades that I know literally nothing about... ha.
An appraiser answering this question would likely say something about how it's local to your market. A great heating system is going to go a lot farther for you out in Michigan than it would here in California, and similarly something in the kitchen making it vegan friendly will likely go farther here than it would for you.
Hi Delmas,
For my properties, I try to be proactive and spend money to lessen or avoid calls from tenants unless it's an emergency. I make sure things like the plumbing hoses and pipes around the sinks and toilets are new and installed correctly. You can also put a clause in the lease (depends on your state tenant/landlord laws) which states any repairs under $50-$150, the tenant has to fix it themselves.
@Charles Kao Hopefully those repairs are actually from the pet and your post isn't what it seems. You post seems that you are "stealing" your tenants security deposit. I understand the tenants need to pay for the damage they caused but they don't need to be buying upgrades for your rental.
You can also put a clause in the lease (depends on your state tenant/landlord laws) which states any repairs under $50-$150, the tenant has to fix it themselves.
Awful advice.
If anything is wrong, tenant calls landlord, landlord fixes.
You start charging for little things like this, expect nothing to be done. When you get the house back you'll find small problems that are now much bigger problems, especially leaks rotting out all sorts of things and mold.
You are also ensuring that your turnaround will be that little bit longer as you are fixing lots and lots of little things that the tenant overlooked because the $150 repair charge in your lease.
Also, the last thing you want is for a tenant to be fixing some of this stuff himself. Tenant electrocutes himself whilst changing the dryer receptacle. Not a good place to be. There are too many stories of tenants hurting themselves, and the landlord getting sued for a lot.
I don't upgrade anything generally unless I have to or its a complete stopper. I just clean and paint and charge a high security deposit by allowing a pet. Once person moves out I generally I am able to find cause because of the pet to keep all of security deposit so I use that to upgrade place. So basically I use the pet to get me market rent or higher and rented quickly then I renovate with OPM to get the same market rent and stop marketing to pet owners.
Wow, you really are the reason we have tenant friendly states.
I've highlighted the bit that could be considered theft.
Hi Delmas,
For my properties, I try to be proactive and spend money to lessen or avoid calls from tenants unless it's an emergency. I make sure things like the plumbing hoses and pipes around the sinks and toilets are new and installed correctly. You can also put a clause in the lease (depends on your state tenant/landlord laws) which states any repairs under $50-$150, the tenant has to fix it themselves.
If I'm your tenant I don't call you to fix that drip leak under the sink to avoid your service charge. Meanwhile your subfloor rots out and costs you a small fortune after I move out.
@Robert Nason I realize I did not buy any goodwill or benefit of the doubt with my first post, but if you saw my properties they are in way better condition to start than most rentals people are buying for their renters. Reason why is because I started out doing live in flips or househacking so I lived in these places myself and/or I purchase from owners that lived in the place themself. It is my experience that renters do not take care of something nearly as well as you will I and I will not get the return on replacements in my market because if someone is going to pay 2-300 more for upgrades then they may as well buy their own house for the same money. With that being said prior to relocating, most of my tenants who moved out for pets did not move out because of the lease but rather because they got married, relocated for job and other things. I am also quick to respond to tenants while in their lease so I am not sure why you would take offense to something you or any other landlord would do, if it required. I don't see it as being unethical to not upgrade unless required or horribly aesthetic and I would say that I percieve I am in the majority when buying turnkey properties. Now if I am buying a foreclosure, I am not upgrading, I am replacing. If the foreclosure is 85 years old then naturally that is going to be an upgrade over existing cabinets even if I go to home depot and get stock cabinets in most cases. For purpose of this thread I think there is confusion on whether we are talking about replacement vs upgrades now.
It was very clear that you used a pet deposit to make required upgrades. That is the same thing as stealing someone's money in my opinion. You gave lots of excuses for your negative post, but no real answers. It's my suggestion to you is to do little soul-searching. Maybe being a landlord is not for you.
You can also put a clause in the lease (depends on your state tenant/landlord laws) which states any repairs under $50-$150, the tenant has to fix it themselves.
Awful advice.
If anything is wrong, tenant calls landlord, landlord fixes.
You start charging for little things like this, expect nothing to be done. When you get the house back you'll find small problems that are now much bigger problems, especially leaks rotting out all sorts of things and mold.
You are also ensuring that your turnaround will be that little bit longer as you are fixing lots and lots of little things that the tenant overlooked because the $150 repair charge in your lease.
Also, the last thing you want is for a tenant to be fixing some of this stuff himself. Tenant electrocutes himself whilst changing the dryer receptacle. Not a good place to be. There are too many stories of tenants hurting themselves, and the landlord getting sued for a lot.
You brought up a valid point that there's a possibility that tenants may not declare an issue to avoid having to pay for it out of pocket and could escalate into a major problem. I've been fortunate so far to not had this problem yet, but I will def take what you said into consideration moving forward.
Not sure if the tenant fixing it themselves threw some people off (really meant they're responsible for covering the cost below $50-$150), but I have exceptions within the lease agreement that state any issues relating to plumbing, septic, electrical etc. need to be addressed and paid for by the landlord regardless of cost.
$3000 in kitchen work, and an afternoon of your elbow grease that would otherwise have been spent doing non-income-generating activities, to turn a neglected kitchen into an amazing gorgeous kitchen, to bump rent by $50/month?$50 * 11 / $3000 = 18% cap.
Of course, you're in Oakland / SF -- 3k for a kitchen upgrade gets you 5 cabinets. Countertops before installation are going to run you another 3-5k minimum for a small kitchen. Hope you don't want to do any plumbing, gas, or electric. The permits for this will run you another thousand or so, so you're really looking at ~15k before labor for a small 10'x6' kitchen. And then your property taxes go up (if you change the quality of the fixtures or the sq footage of your kitchen).
@Charles Kao you kind of said one thing, then back peddled when everyone started calling you out. Pet deposit is for damage caused by the pet, not upgrades. Carpet is the most common problem I see with dogs. Still you can only legally charge for the remaining life in the carpet. For example, if you decide the carpet is worn out prior to the tenant moving in, you cannot charge them to replace it when they move out. Even if the dog pees on it, you can only charge for the remaining life of the carpet. For example if the carpet is 15 years old, it is well beyond its useful life. Even if the carpet is stained, you cannot charge anything because has no remaining value. @Login George mentioned what you are doing is unethical, but it could be illegal.
You could get a cabinet guy to make you some simple shaker doors pretty cheap (including hidden hinges). They offer different hinge hardware for plywood cabinet bases and hardwood. Sanding, caulking, primer and 2 coats isn't all that expensive for the doors.
Changing hardware is fairly cheap too, they have all kinds of places online that offer reasonably priced nickel/oil-rubbed bronze hardware.
Porcelain tile counter tops with a hardwood bull nose are very cheap install and easy to do yourself. Same with backsplash. You could even look in the buddy rhodes and do some custom concrete counter tops for no much more. Both of these options are very durable.
I would pay someone to lay flooring however. Unless you have concrete subfloor that can be stained and sealed. That process is very simple and can cut your cost from ~3500 (1200 sf) to little over 600.
Changing fixtures in the kitchen and baths can boost appeal as well.
Finally, of course a fresh coat of paint on the walls that are a good neutral color.
"Upgrades" is a highly subjective term. In some places that might mean all the bedrooms have doors and the plywood subfloor has been covered with peel and stick tiles. In others it means the granite counters were ripped out and replaced with quartz.
The key is finding out what your target renter expects and what they will pay more for.
I wouldn't say there is a "standard upgrade" in a rental property. All properties differ. One thing I can say is I wouldn't do an upgrade unless you know, for a fact, you can recoup your investment and get a return in the amount of rent you get on a monthly basis. There is no sense putting granite counter tops in a unit when the market does not see that as a necessity.
I appreciate all the feedback from everyone. I will definitely allow pets not for upgrades but to people who will be responsible for their animal and definitely for the disabled. I just want to make renters feel like the properties I rent is a home they want to raise their families or just live there forever. I just want to be fair with the upgrades projects and not be cheap because not all tenants destroy the rentals .
$3000 in kitchen work, and an afternoon of your elbow grease that would otherwise have been spent doing non-income-generating activities, to turn a neglected kitchen into an amazing gorgeous kitchen, to bump rent by $50/month?$50 * 11 / $3000 = 18% cap.
Of course, you're in Oakland / SF -- 3k for a kitchen upgrade gets you 5 cabinets. Countertops before installation are going to run you another 3-5k minimum for a small kitchen. Hope you don't want to do any plumbing, gas, or electric. The permits for this will run you another thousand or so, so you're really looking at ~15k before labor for a small 10'x6' kitchen. And then your property taxes go up (if you change the quality of the fixtures or the sq footage of your kitchen).
Fair enough; like I said I'm not a kitchen contractor guy or anything. The math/concept is what I was trying to convey, I picked something arbitrary.
So what do renters care about the most as far as renting any property? Do the main concerns be like the kitchen updated, bathrooms, carpet or flooring and response time with property issues?
When I buy a new place (or with the first vacancy after a legacy tenant moves out), there are a number of things I consider. Some of my items are influenced by living in a hot, drought-ridden climate (southern california) and having things my children can get experience working on and be involved in the business.
I replace toilets with low flow / dual flush models with a high (16.5") height. Putting a new toilet in not only "upgrades" the bathroom, but reduces my water costs, reduces tenant complaints about the toilet that runs in the night, and reduces high water bills (which I pay). The high height keeps heftier tenants from slamming their weight down on the stool. I will replace the toilet seat every few years when it starts looking worn or wobbly. New tenants appreciate a new toilet seat more than you'd imagine.
I usually replace mini blinds on every window between tenants unless it is in really good shape. I use relatively cheap ones which do break down over time, but aren't expensive to swap out. Besides, they are a pain to clean.
I put solid locks on the doors (kwikset titan, from landlordlocks). My daughter learned to change these locks at age 9. Once I've changed them, "rekeying" for a new tenant is done in seconds.
I frequently replace cheap screen doors with security screen doors. Not that my units are in high crime areas, but it gives people confidence to go out and leave their house open and they last much longer without looking shabby. I sometimes replace front / back doors as well if the existing ones are really worn.
Air conditioning. Window units, through the wall, or central depending on the home. Ceiling fans as well in dining rooms, living rooms, bedrooms. My son likes to put LED bulbs in them so the tenants don't have to change them out (and end up screwing up the balance on them or losing screws).
New switchplates and outlet covers. Its a cheap upgrade to the old ones with many layers of paint. I will replace really loose outlets or switches. New cabinet pulls and knobs are cheap and make the place classier.
New interior light fixtures. Replacing a 40 year old ugly/cracked/corroded/painted over fixture with a modern $10 fixture with a bright LED bulb really improves a hallway or bathroom.
New exterior porch lights. The places I buy usually seem to have the ugliest fixtures. I can swap them out for a new $15 home depot special in 10 minutes and make the porch bright and inviting.
New aerators for the kitchen and bath faucets. Low flow, and not corroded after years of use.
I tile my kitchens and bathrooms if their flooring is worn.
None of these upgrades are going to get new tenants to pay me a bundle for the one item, but in aggregate they allow me to charge $100 - $150 more than basic 1br units (about 10-15%) in my market, and they rent faster.
Do whatever upgrades the rentals around your property are doing to get top dollar in that location. Make sure the cost of the upgrades makes sense relative to the amount of time it will take to recoup that money in rent. If it does not and the variation in top dollar from average rent is small, then it could be a waste.
I need a recommendation for new toilets for a rental unit. I will be buying the "comfort height" model.