Renovate to increase cash flow?

Question

I own a 2-bedroom townhouse with one full bath and 2 half baths. I am currently house hacking by living in the basement and renting out the two bedrooms upstairs. Legally, I can't rent out the basement as there is no window. In a few years I'd like to rent the property fully, and it looks like I can conservatively get get $2000 a month. I'd like to get more cash flow from this property. Doing the math for maintenance savings: $200.00 month, Cashflow: $308.93. Should I rent it out with some small cosmetic fixes or make the master bedroom closet smaller to add a shower?

Jesi Young · Answer

Hi Chantel,

It is great that you are making all of these updates before renting the entire townhome out! It's much more efficient to take your property to market in great condition, rather than orchestrating renovations with new tenants in there. You may command higher rents in the initial offering, too, rather than waiting for lease renewals to up your rents.

I would check with other rentals in your townhouse community to see if the shower upgrade will increase the rents that much. Have other owners done this? What is the price difference in rents? That should give you a better figure for if that addition seems "worth it."

It sounds like you are on the right track! Good luck :)

Mike Juliff · Answer

I would also consider your long term plan. Are you going to house hack another property? Might be better to save money for that property rather than put it all into one egg. I would make all of the improvements that are going to make your job as a rental manager easier (sounds like you have some long term maintenance items to take care of). How does your place compare to other rentals in the area? Even if you make your place immaculate, it may not command that much higher rent because the area doesnt support it.

Chantel Holsather · Answer

Hey Peter,

Unfortunately, a window can't be added to the basement. I thought about maybe converting the living room with a fireplace on the main floor to a 3rd bedroom, but I'm not sure if the HOA would allow such a big change to the layout. Also, I think it would make the kitchen and dining area awkwardly small. Maybe a breakfast nook is ok for the main floor? I suppose I could email them and see.

Peter Mckernan · Answer

I am always an advocate if you can fix up a property to make it more marketable, that is really the way to go. For your example, making the basement fully operational as a livable space seems like a great value add. If you were going to just do a remodel like a flip and not add living space I would say that would not get you more money. The things that give a rental a value in cashflow are benefits to the tenant in the form of living amities.

For example of above, there was a person I know, they bought a house for a rental, the square footage was enough to make a 3rd bed out of a dining room, that would increase the month rent by $400.00 a month if they did that.. So they permitted the room as a bedroom and do the work through a contractor for $20,000 and now they get more money today due to livable pace added verse a dining room that was not providing as much value as a rental.

Chantel Holsather · Answer

Hey Jaron,

I only reached out to one guy in the summer to see how much I needed to save. But I definitely plan to get more quotes. I don't remember exactly, but its on top of my 2-car garage, so 20 ft by 22 ft maybe? He said the frame was rotten under the floorboards, so that also needs to be done.

Jaron Walling · Answer

@Chantel Holsather "the estimate I got last summer was $12000" - Did you mean to say $1200? Big is the deck?

If a contactor is replacing only the decking (boards you walk on) $12k is a ripoff. You should be able to build an entirely new deck with concrete footing for less.

Chantel Holsather · Answer

Thank you, Vince! I'm slowly making smaller improvements, like paint, light fixtures, and outlets, but my townhouse does need some larger repairs, such as new floorboards for my large deck (not covered by the HOA), an overhead light in the master bedroom, and new flooring in the basement. The deck floorboards aren't in the best shape, so I should probably do that first, and the estimate I got last summer was $12000. I could probably hold off on the basement flooring, though. I think I'll have to wait 2-3 years to pay for the renovation unless I take out a loan for the shower renovation.

Vince Scipione · Answer

It really depends on your specific market. I would look at comparable properties and observe the average rents. However, in most markets I would assume an additional full bathroom would not only command higher rent, but would increase the equity and appreciation. It is important to note, people would rather rent a cleaner, and newer home, than a "larger." I would do the shower renovation first, then take the cashflow and stash it for a rehab after this tenant leaves.