When does a rental home renovation cost too much?
I purchased my first home while college and it needed a ton of work. I used this home as my “crash course in home renovations”. I did all the work myself by watching YouTube videos and asking a few friends for insight (aside from moving a gas line and a some electrical) but I feel I went overboard with the reno budget. I don’t regret the money I spent since I have learned so much about renovations.
I have no idea what I spent on the rehab. I did small bits over 3 years when I could spare some money and find supplies on sale. I was a broke college kid! I have no plans to sell the home in the near future. The interest rate is extremely low, I have great equity, and with the university expanding I don’t fear demand will dry up.
Home: 3 bed, 1 bath, 2 car carport, 1780 sqft. The home is in Lubbock and roughly 1 mile from Texas Tech University and a half mile from two major hospitals.
I listed the home the week before Thanksgiving. I priced the home about $100/month over what other 3/1’s rent for in the area. I figured the home would sit on the market for a few weeks since this is an odd time of year, it has one bathroom, and it’s more expensive than 90% of the homes in the area. However, I was pleasantly surprised. After being inundated with calls from prospective tenants, I had to remove the listing after 4 days. I showed the home to 7 people and 5 them wanted to put a deposit down the same day. So, I rented the home in less than 5 days and receive $415 in cash flow/month.
I’m on my next project and I’m in the process of rehabbing the property now. We plan to purchase another home in 10 months. (rinse and repeat)
I want to gut the majority of the property or at least make the home more appealing than 90% of the homes in the neighborhood. Spending extra on mechanicals and materials to increase the lifespan and designing the house so can be easily maintained (adding service panels to shower control valves or vanities, etc.) Also, while improving the layout and design of the home with above average materials.
Here’s my theory: (all assuming the cash flow is positive and enough to cover expenses)
If I can over engineer the property and spend a little more now, I will reduce the risk of costly repairs caused by mechanical failures like water leaks, HVAC issues, or durability of fixtures. The home will stand out among the other rentals, lowering vacancy and reducing turn-around times. I want my rentals to look better than 90% of the rentals in the area, and I want to appeal to top notch tenants that are willing to pay more to have the best. Also forcing appreciation will increase the equity in the home and allow me to pull money out of the property sooner. [Reduced repair costs, lower vacancy, higher quality tenants, higher rent, and more equity.]
The downside of this theory:
1. I can’t know for sure the home will appeal to high end tenants.
2. Forced appreciation is not a guarantee or at least I can’t guarantee I will break even
3. I’m reducing my cash-on-cash return by putting more money into the property
4. I could be spending the extra money on purchasing more homes. (quantity over quality kinda thing)
5. The opportunity cost of spending more time remodeling a rentals slows my growth
Ignoring my degree in finance and my rational brain. I enjoy remodeling homes. I take pride in building things with my hands and designing a home that people love. I enjoy the creative aspect of taking a bathroom down to studs and starting over. This contradicts the finance/rational part of my brain that wants to spend as little as possible and move on to acquire more properties.
I’m not as concerned about the property generating large cash flow to “free me from my 9-5”. I have no plans to become a full-time investor or quit my job since I enjoy my profession. I am more concerned with growing the value of my portfolio, reducing risk, and increasing my investment opportunities.
- If I can get above market rent, force appreciation, reduce vacancy, and reduce the risk of large capex, but slow my growth acquiring properties and reduce cash-on-cash return; is it a good investment decision? What risks or downsides to this approach am I overlooking?
- We like to pretend that we are emotionless financial robots, but lets be real.. What value do you put on pride of ownership or the quality of your properties?
**I intentionally left out the numbers and I do realize asking, “is this a good investment?” is a difficult question without reviewing the details. This is more of a high-level/macro view and I’m trying to gain insight to how others view the quality vs quantity conundrum.
Thanks for any input you have!
