Spend $15K on renovations to get a $305/mo. rent bump?

25 Replies

Would you spend $15K on renovations to get a $305/mo. increase in rent?

Let's assume that the renovations will cost $15K exactly and the rent increase is accurate.

I have two condos on Oahu, Hawaii that have been producing roughly $1600 rents for many years. By adding tile floors, new cabinets and counters, new fixtures, new applicances, I think I should be able to get $1900 for rents no problem.

I have not done a renovation of this scale, so if anyone can recommend contractors in Honolulu, Millani, Kailua, or Oahu in general that would do this kind of work, please do here or PM me.

Also, I have no idea if I am able to write most of this off as repairs, or will I have to amortize the cost (not favorable)?

I have recently thought I should sell my small rentals and just focus on 100% passive investing. Then I realized, it's probably not a good idea to sell cash flowing and appreciating assets in HI that also deliver great tax incentives.

Would love to hear your thoughts on anything I have outlined above. Thanks for reading, sharing, and have a lovely weekend!

Sounds like a great position to be in. I agree, hold real estate in Hawaii and give it to your kids or next in kin when you pass. As far as would I spend 15K to get $305 a month... I would, but would prefer a bit better of a return if possible. I buy houses for 19k with a 6k rehab that rent for $850 a month. 

If you can spend 12k, it will be a slam dunk.

Good luck!

Yes, I have spent that and would again. That is right at the 2% rule which for Hawaii is especially great! I think you can take it all in this year; but I am not an accountant and do not recall how quickly we wrote that off.

You're getting $3,660 pure income flowthrough per year on $15,000 outlay, or 24.4% IRR. Seems like a no-brainer to me.

I don't believe you get to amortize the cost, but you would add it to the cost basis of the home when you sell it and get the tax break then.  I'm not an accountant though.

Originally posted by @Jonathan R. :

Sounds like a great position to be in. I agree, hold real estate in Hawaii and give it to your kids or next in kin when you pass. As far as would I spend 15K to get $305 a month... I would, but would prefer a bit better of a return if possible. I buy houses for 19k with a 6k rehab that rent for $850 a month. 

If you can spend 12k, it will be a slam dunk.

Good luck!

 These are condos that have appreciated quite a bit.. ie. I bought them for about $150-170K, now worth closer to $300K. So what has happened is, rents have flattened out since they are in close to original 70s condition. They still generate a solid $500 per month in cash flow.

Originally posted by @Bjorn Ahlblad :

Yes, I have spent that and would again. That is right at the 2% rule which for Hawaii is especially great! I think you can take it all in this year; but I am not an accountant and do not recall how quickly we wrote that off.

 Can you explain what you mean by this being right at the 2% rule? Please see my response above for some more info on the properties.

Originally posted by @Frank Jiang :

You're getting $3,660 pure income flowthrough per year on $15,000 outlay, or 24.4% IRR. Seems like a no-brainer to me.

I don't believe you get to amortize the cost, but you would add it to the cost basis of the home when you sell it and get the tax break then.  I'm not an accountant though.

Hmm. I never thought about it that way. Even if I could get an extra $3000 per year, that is like a 20% IRR, is my math right on that?

I am not sure how that works. They already have a depreciation schedule. So the amount for the rehab would just be tacked on to it? So I would get $15K ÷ 27.5 every year? Or $15K ÷ 15?

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Originally posted by @Account Closed :

You are describing amortization stuff.  Do rental comps support your claim of $300 bump is in line with the market.  If it is get on it.

You ever thought of selling one of your condos and exchanging it into a Trump Waikiki.   The numbers seem to good to be true if you vacation rental it.

 The words Trump Waikiki are music to my ears. Do they allow short term rentals? If you can, please elaborate on specifics and numbers to what you're referring to.

Originally posted by @Andrey Y. :
Originally posted by @Bjorn Ahlblad:

Yes, I have spent that and would again. That is right at the 2% rule which for Hawaii is especially great! I think you can take it all in this year; but I am not an accountant and do not recall how quickly we wrote that off.

 Can you explain what you mean by this being right at the 2% rule? Please see my response above for some more info on the properties.

Andrey,  While not entirely kosher I am taking the 15k portion as an incremental investment-it requires no additional services or maintenance and if you are getting that extra rent from the 15k then it meets the 2% rule-300/mo is equal to 2% of the 15k. Crazy? In effect the property improvements are often providing a greater return than the original investment was. And unlike a roof generally carpets and flooring and paint etc. are expenses and deductible in the current year. I am not an accountant so check with yours- and it won’t help to say Bjorn told me it was OK!;<)

Originally posted by @Andrey Y. :
Originally posted by @Frank Jiang:

You're getting $3,660 pure income flowthrough per year on $15,000 outlay, or 24.4% IRR. Seems like a no-brainer to me.

I don't believe you get to amortize the cost, but you would add it to the cost basis of the home when you sell it and get the tax break then.  I'm not an accountant though.

Hmm. I never thought about it that way. Even if I could get an extra $3000 per year, that is like a 20% IRR, is my math right on that?

I am not sure how that works. They already have a depreciation schedule. So the amount for the rehab would just be tacked on to it? So I would get $15K ÷ 27.5 every year? Or $15K ÷ 15?

Yes, your math seems spot on. The only thing I'd consider is if it would be possible to raise rent regardless of whether or not you put in the upgrades. You likely have an increase due to general appreciate as opposed to gain from fixtures or the quality of the interior of the apartment. I would use this number to calculate the gain in IRR as opposed to the gross gain from the current.

My understanding is that you would get no tax break until you sell.  You would not be able to depreciate this additional 15K.  Let's say you bought the property for $150K and it is now worth $300K.  My understanding is that you would normally pay capital gains tax on $150K, but since you put this $15K in, you would only pay capital gains tax on $135K.

But again, I'm neither an accountant nor a tax specialist.

@Frank Jiang It's a 24.4% return not IRR. Wrong metric.

@Andrey Y. 24.4% is a great return. You should find more condos where you can do this and rinse-and-repeat this strategy all day, every day. 

Just be sure around your #s. But if they work, close your eyes and go for it!

Originally posted by @Omar Khan :

@Frank Jiang It's a 24.4% return not IRR. Wrong metric.

@Andrey Y. 24.4% is a great return. You should find more condos where you can do this and rinse-and-repeat this strategy all day, every day. 

Just be sure around your #s. But if they work, close your eyes and go for it!

As a perpetuity, IRR is the same calculation as ROI. That's actually where ROI comes from.

Originally posted by @Frank Jiang :
Originally posted by @Omar Khan:

@Frank Jiang It's a 24.4% return not IRR. Wrong metric.

@Andrey Y. 24.4% is a great return. You should find more condos where you can do this and rinse-and-repeat this strategy all day, every day. 

Just be sure around your #s. But if they work, close your eyes and go for it!

As a perpetuity, IRR is the same calculation as ROI. That's actually where ROI comes from.

https://www.investopedia.com/terms/p/perpetuity.asp

That assumes Andrey is going to live forever or hold this property forever.  

Originally posted by @Omar Khan :
Originally posted by @Frank Jiang:
Originally posted by @Omar Khan:

@Frank Jiang It's a 24.4% return not IRR. Wrong metric.

@Andrey Y. 24.4% is a great return. You should find more condos where you can do this and rinse-and-repeat this strategy all day, every day. 

Just be sure around your #s. But if they work, close your eyes and go for it!

As a perpetuity, IRR is the same calculation as ROI. That's actually where ROI comes from.

https://www.investopedia.com/terms/p/perpetuity.asp

That assumed Andrey is going to live forever or hold this property forever.  

Yes it does.  It's effectively the same if you hold it for 10+ years.  The net result of the formula is an insignificant amount different if you hold it for long enough.

@Frank Jiang Eventually, most projections will have an insignificant difference over a long enough time horizon. 

Most folks are assuming shorter time frames (although you might be right as I do not know how long Andrey wants/prefers holding on to this asset) because they either want to move up or sell the property (same thing, in my eyes). 

Also, over the extremely long run, we are all dead but we can't run projections based on 20/40 year projections as nobody can accurately predict that long into the future.

Originally posted by @Omar Khan :

@Frank Jiang Eventually, most projections will have an insignificant difference over a long enough time horizon. 

Most folks are assuming shorter time frames (although you might be right as I do not know how long Andrey wants/prefers holding on to this asset) because they either want to move up or sell the property (same thing, in my eyes). 

Also, over the extremely long run, we are all dead but we can't run projections based on 20/40 year projections as nobody can accurately predict that long into the future.

Totally agree with you on future predictions.  At the end of the day, the discussion you and I are having is purely semantics. 

Here's the logic behind my viewpoint on calculating IRR. From the information given, the net result of his change would be an increase in rent that lasts forever, i.e. a perpetuity. This sounds weird to say, but the IRR or ROI of the investment is the same whether or not Andrey is alive. The way I view the calculation is that it affects the net value of the property itself, not the value of the property relative to Andrey. Does that make sense?

@Frank Jiang Theoretically, yes. Practically, I can make a solid case that condo rents are not in perpetuity (more volatile than say, C Class apartment rents) as they require some level of negative cash flow (repairs) to maintain the rent-level. 

Some of these cash flow can be predicted. Some can't like special assessments by the condo board (a big reason why I don't like investing in condos). 

But you are correct on the overarching theme: We are purely talking about semantics... lol

An investor purchased 2 mobiles homes from a long time tenant who was paying lot rent in my mobile home park. After 3 months or rehabbing the 2 homes he ran out of cash. He contacted me and ask if interested in buying both homes for $6000 and I said I will think about it bc I had many other park owned homes that need attention.
The investor would contact me periodically until after 14 months I offered him $2000 for both trailers including all the materials he bought that was left inside. He owed me over $7000 of lot rent over those 14 months.
Finally We agreed to pay $2400 for title of both trailers. I spent another $600 on both mobile homes that rents for $700 and $550 respectively.
Best $3000 I ever spent. Adding $15000 annually rent and $12,000 to my NOI. You 10 cap that it is $120,000 in value.

Your scenario adding $300 a month adds $3600 annually. That is a quarter of your investment

could you reduce the reno (as in paint cabinets/update hardware and maybe skip countertops). Skip tile and w/ cheaper flooring... you probably could shave 5k off that budget and save the bigger remodel for when you put it on market.

Originally posted by @Omar Khan :

@Frank Jiang Theoretically, yes. Practically, I can make a solid case that condo rents are not in perpetuity (more volatile than say, C Class apartment rents) as they require some level of negative cash flow (repairs) to maintain the rent-level. 

Some of these cash flow can be predicted. Some can't like special assessments by the condo board (a big reason why I don't like investing in condos). 

But you are correct on the overarching theme: We are purely talking about semantics... lol

 Some real numbers for you.

I think I purchase one end of 2013, one in 2014.

One has not changed HOA fees (or went up like $20 at most) to ~$475

Other one, HOA fees actually went DOWN, from ~$445 to ~$379 !

It seems like the HOA fees roughly double every 15-20 years, but the property values double roughly every 10. So far, I have seen a net decrease (at least for the two in question).

Originally posted by @Frank Jiang :
Originally posted by @Omar Khan:
Originally posted by @Frank Jiang:
Originally posted by @Omar Khan:

@Frank Jiang It's a 24.4% return not IRR. Wrong metric.

@Andrey Y. 24.4% is a great return. You should find more condos where you can do this and rinse-and-repeat this strategy all day, every day. 

Just be sure around your #s. But if they work, close your eyes and go for it!

As a perpetuity, IRR is the same calculation as ROI. That's actually where ROI comes from.

https://www.investopedia.com/terms/p/perpetuity.as...

That assumed Andrey is going to live forever or hold this property forever.  

Yes it does.  It's effectively the same if you hold it for 10+ years.  The net result of the formula is an insignificant amount different if you hold it for long enough.

 This is the crossroads.

Either I do these renovations and hold for 20+ years, until depreciation runs out.

Or I sell in the next year or two.

@Ben Leybovich

@Minh Le

@Lane Kawaoka

Any input on this, guys?

So - the answer is a function of the put-forth objectives - objectives that you set forth when you bought. If you can achieve desired ROI by selling now - sell. If not - hold. Don't get greedy and try to over-perform by spending money and time. Sell and take risk off the table as soon as you reach the hurdle - done.

It all matters what is your other options. If you can't find deals that you can make 15-25 percent your money then this is a good place to stay.

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