Applying the 2% Rule to Improvements and Additional Items

[Matthew Hodge]

I've got two questions, but they're related. First of all, how should we apply the 2% Rule, or another similar guideline, to improvements? Specifically, I've got a triplex that doesn't have central heat and air. The three units will each rent for $50 more if I add it. In order for it to conform to the 2% rule, I need to get the work done for $7,500. Am this a misapplication? Do you guys use a guideline like this for improvements to rental properties you own? Is a 1% rental rate return on improvements enough to justify making the improvement on rental return alone? Obviously we aren't going to over-improve for an area.

My second question is related: We are going to offer to the optional rental of a stackable washer/dryer to our tenants. Do you have a rule for how much to charge for additional items like this? If they will only pay $40/month for the washer/dryer, what's the cap on what I can pay for the appliance to make it profitable, in your experience?

[Ned Carey]

I wouldn't use the 2% rule. I would look at the return on investment. How much will the improvements cost? How much will I get back in rent? Then you have to decide is that a good enough return for you.

Of course some repairs are just necessary. If you need a new water heater or roof, you don't think about the return on investment. You think about the fact your tenant needs hot water or you need to protect your investment from water damage.