Hi bigger pockets community,
I bought my first property last month, it is a 3 family home that I am owner occupying. Financed 3.5% down with an FHA loan, and looking to buy a second property in the same market (east side of Providence, RI) in the next year or two.
The tenant pool is either Brown/RISD students, young grads, or professionals. Each unit is 3 bedrooms, but they are on the medium to small side, and the interiors is just the basics. I am fairly confident I can raise rent by $200-300 per unit if I do some upgrades (I.e better faucets, add a dish washer).
The question is, how much should I plan to repair/upgrade based on the age of the property? Is there a guideline for the age of a property where repair costs skyrocket?? (Like with a car beyond 200k miles).
First off, congrats! Great job dipping into real estate. As far as doing upgrades, I am assuming you got a property inspection done. I would examine that report and see what is said because it should state what is need of repair. If you do not have that report then you should shell out the money and get it done. If it's in fairly good shape, then depending on the financials behind the deal, I would probably upgrade slowly rather than all at once. Maybe upgrade one unit per year.
@Jennifer Cheu with a few exceptions, most properties you're going to run across in RI, especially in Providence, were built in the early 1900s, like 1920-1940.
So I wouldn't base your repair/upgrade decisions on the age of the property.
There are a lot of competing issues that go into deciding what to repair/upgrade when. One consideration is how "visible" the repair/upgrade will be to tenants, and, related, how desirable and worth more rent or less vacancy (because it will rent faster).
However other considerations are basic safety and liability. For example, if you had active knob & tube wiring you might decide to replace it, which would be very expensive and not visible to the tenants at all, but you might decide is worth it for safety/liability reasons.
Related, sometimes your insurance company will request/require certain repairs to be made - they seem to be doing that with increasing (annoying) frequency over the last few years actually.
There's also the issue of what's competitive in your market/area. For example if most of the buildings in your area have on-site laundry then maybe it's something you consider adding just to stay competitive.
If you think of selling it, down the road, you might designate one unit as the "owner's unit" and make it a notch nicer than the rest.
On the other hand, depending on your tenant pool, you may find that sometimes it's better to go with more durable than more visibly "nice" to tenants, just for wear and tear (and eventual replacement) purposes. Sometimes with rentals there's "good enough" where springing for the really nice option just doesn't get you the return on higher rent you think it might, and if the item is going to get worn out or damaged by tenants in a few years anyway, it might be better to go with "good and durable" instead of "really nice".
As you can see there are a lot of considerations, and none of them really have to do with the age of the property. There are some issues related to the age of the property (like knob and tube, use of asbestos pipe coverings, etc.) but those are more major things your inspector would have pointed out and you'd be aware of before getting into the property (and in some cases your insurance may have required addressing, such as removing an old/unused oil tank).
I hope this helps in some way, and congratulations on your purchase!
I also think that @Steve Kontos 's suggestion about upgrading one unit at a time is a good one, and is a strategy I've used myself, mainly when there's a vacancy and my contractors are able to fit the project in.
@Jennifer Cheu I think the only time rehab costs may "sky rocket" on an older property is if you are upgrading infrastructure like Knob & tube wiring or heating systems.
As far as upgrades on the East Side of Providence I would recommend aiming high. You are going to see a great return on your money investing in Stainless Steel appliances, granite countertops and pristine hardwood floors.
If you focus on your tenant target market, think about the homes they grew up in. Most of these students that attend Brown/RISD come from affluent neighborhoods and are not going to be interested in C Class property upgrades. They are looking for these finer finishes and are certainly willing to pay for them.
@Steve Kontos Thanks for the breakdown, really helps me understand how I should analyze it. I did get an inspection done, but the real conditions are coming out after having lived here for a month (roof already has a leak, bathrooms have fans but doesn't vent outside the house, 1 gas furnace is not working). Went back to home inspector but got nothing.
The thing I'm struggling with is drawing the line between immediate repair vs. upgrades. I've got 1 window with the corner coming apart, still opens/closes, leaky faucets (I've repaired already), bathrooms need ventilation outside but the floor joists are in the way. 1st floor bathroom with serious wet rot down to floor boards. Roof with 1-3 years left. I hear from tenants the basement will get wet when there is a lot of snow outside. A lot of these things didn't come up in the inspection, or maybe I missed it.
For reference, I bought the house at $435k, seller paid $3k closing costs. I was able to increase rent to $1500, $1200, $1400. PITI is $3,242.
@Anthony Thompson I like your explanation. This property I think has potential, but am realizing it might be costly to upgrade. Like many other old houses I assume, the repairs have not been done very well, every time I touch something, it seems to throw the delicately repaired functions of this house out of balance (i.e. fix a shower valve leak, shutoff in basement starts to leak). Certain things like smaller closets and vinyl floors are concerning to me if I want to fully upgrade to top of the line rentals that will draw the top tier tenant pool. It seems like if I spent my efforts marketing properly I would make a large portion of the potential gain. I.e. line back up to June - June rental cycle, market it at $550 a bed = $1650.
Fix the problems first , upgrades after that
It won't have typical framing like a modern house, so don't be taking out walls because you will end up with more work than you can imagine. Just make the best with what you have, be creative, save time and money.
@Matthew Paul summed it up best but I want to also add that you should definitely press the property inspector because he dropped the ball. Many of the issues you mentioned should have shown a clear indication that should have highlighted in the inspection report. If not, I would get my money back (have pictures of all the missed issues) and get another inspection done so that you can take care of the serious problems first, then worry about upgrades and everything else later.
Congratulations. Having paid $435k for the property, I would ask how much more you could invest and still be able to cash flow. From there, I would reverse engineer the largest projects that you would like to tackle.
@Jennifer Cheu Based on your follow-up about the roof I wouldn't upgrade a thing. Save your money. If anything, replace the roof now since you noted there were leaks. You never know what you'll find when they start stripping off shingles. It might be an easy roof replacement or extremely costly, you just don't know what you don't know at this point. The last thing you want to do is start putting in $200 faucets that look nice instead of roofs, figuring out why there's water in the basement, etc.
To put it another way: If you bought a car that had been in a wreck would you a.) fix the damaged frame or b.) buy some new rims?
Roof = Frame Damage
Faucets/Dish Washer = New Shiny Rims
Just my two cents...
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