How to think about renos during a down condo market?

Question

I'm planning on renting out my condo after purchasing an owner-occupied investment property, and am considering doing some renovations. While the location of my condo is strong, the finishes are dated. I'm considering doing updates like bathroom flooring, kitchen counters/backsplash, etc to modernize the space and make it more competitive to the newer construction condos in the area.

How should I think about this investment considering rents during COVID are ~30% below pre-COVID levels, and there would be wear and tear on the new finishes long before rents return to "normal"? Given long term rents are so low and I think the condo location is so strong, I'm considering giving it a go as a short term rental. How would you compare the ROI of these improvements on a long term vs short term rental?

Ryan Swan · Answer

Where is the rental that you're seeing 30% dip in rent rates? We're seeing the opposite here in Phoenix (even during the peak of Covid). I listed a patio home (basically a single level townhouse) for rent in September and had people crawling over themselves to rent it.

A well run short term rental will generally be more lucrative than a long term rental. Before investing time and money, you should make sure the condo CC&Rs allow short term rentals (<30 day term). If they do not, then you need to be comfortable rolling the dice to operate a STR.

Evan Polaski · Answer

@Eugenia K. generally speaking spending capital on upgrades is not advised in a down market.  If you are not able to lease your condo because it is so dated that it shows as dirty and tenants will not sign leases, then you might consider selective updates, but as a rule of thumb spending money when there is not a clear return on investment would not be a prudent move.

Regarding finishes for a LTR vs STR, generally, with both you want to put in durable finishes.  I will tile around tub surrounds, even on low end rentals, because vinyl surrounds wear out and break after a couple years.  From there, the overall design will draw tenants both long and short term.  But I do think having something eye catching pays larger dividends in STRs where you need to grab attention mid scroll on Airbnb.  Long term renters are going to be more focused on area/neighborhood/school district first, then monthly rent, followed by the actual property.  All this means, having good, eye catching photos helps a lot, but it is not the first thing people will notice like on Airbnb.

Lastly, and I know you didn't ask this, STRs are a lot of consistent work.  Creating and updating your listing, monitoring your bookings, scheduling cleaners, resupplying toilet paper/soap/paper towels/etc.  You can hire services to manage this for you, but they cost more money than long term managers because it is a lot more work on a regular basis.  With business travel down a lot, the Airbnb's that I hear about still doing very well are vacation focused.  If you condo fits this, you can likely do a brisk business.  Of course be cautious of any seasonality too.  My friend in Phoenix that owns and runs about a dozen airbnb's made all her money from winter through spring training.  Come summer and fall, she barely broke even.

Brad Hammond · Answer

Hi @Eugenia K., I think that isn't a bad idea.  Take a look at your rental comps in the immediate area to see if the finishes in your price point are similar to yours.  Even if you need to lower your rent by $50/mo, it might be worth it.

One thing to keep in mind that is often overlooked is you don't have to worry about vacancy right now but when you do your renovation, that time will cut into your vacancy.  Also, double-check with a CPA but I believe you wouldn't be able to write off the renovation expenses until the unit is on the market.

I'm not sure how you would compare the ROI on short-term vs long-term.  I think it would depend more on if you were doing nicer finishes for a short-term rental.