Rehabbing A Rental Property
Last week we discussed rehabbing a home for personal use, this week we will explore rehabbing for the purpose of renting. Of the three main types of rehab, personal use, renting and flip, the rental falls in the middle in terms of risk. If the rental market is strong where the house is located, you do not have to worry about your exit strategy.
A simple fact of real estate investing is that renters will not take care of a property the way an owner would, in most cases. Another fact is that renters do not have the same expectations as buyers when it comes to quality. A person looking to buy a property might expect ceramic tile floors and granite countertops where a renter is quite satisfied with vinyl flooring and a laminate counter. This means that you can spend a lot less money on the rehab if your ultimate goal is to use it as a rental property.
Tenants and buyers will both have certain expectations. They are looking for a home that has the basic systems in good working order. This means that the plumbing and electric must be adequate, the heating system works properly, the roof keeps the house dry and, in warmer climates, the air conditioning functions, as it should. With a rental, if these systems are not in order you can expect to have higher than normal maintenance costs.
Regardless of the ultimate goal, any rehab should include bringing the basic systems up to an acceptable level of performance. This is not an area where you should cut corners. Upgrading the electric or the plumbing doesn’t have the pizzazz of a new kitchen or bath and won’t add much value on resale or yield a higher rent. However, a house with the basic systems in poor condition can subtract value and make it difficult to sell or rent a property.
Renters tend cause a greater amount of wear and tear than owners do. That being the case, you should usually choose items of greater durability wherever possible. When choosing carpet, paying a little more for a product with better durability may actually be less expensive in the long run. If you can avoid using carpet I certain areas, even better. You could consider using a product laminate flooring in high traffic areas.
When the time comes to sell a property, you can go back and complete the rehab. The time to do the fancy things and add the amenities that buyers love is when you are ready to sell. There is no point in doing a lot of high-end, high-cost rehab on a rental. More likely than not, you will just need to do it all over again when you are ready to sell.
Buy It Right
One of the most difficult aspects of real estate investing is finding property that will provide a positive rental cash flow. As hard as it is, it is significantly easier if you buy rehab property. Since a fixer-upper should be available for well below market value, it is likely to command a much higher rent as a percentage of purchase price. House “A” and house “B” may command the same rent if they are in comparable condition. However, house “A” may sell for $100,000 at full retail, but house ”B” is selling for $50,000 with $20,000 in repairs needed. The total costs for house “B” was $70,000 but will rent for the same amount as house “A” even though that house costs $30,000 more. That could well be the difference between a house that helps put food on the table as opposed to a house that eats you alive.
A fool and his money are soon elected.
– Will Rogers