How nice should you make your rental properties?
Imagine that it’s time to renovate or improve your properties, and you need to make some choices. Do you buy the cheapest Project Source bath vanity, or spend an extra $100 – $150 on something nicer? Do you buy the American Standard basic kitchen faucet, or spend an extra $50 giving your sink a little face-lift?
Obviously, your choice will depend on the neighborhood and type of home that you’re remodeling. You don’t want to over-improve your properties. There’s no reason to put granite countertops in a Section 8 rental.
But at the same time, I’m an advocate of generally making the home slightly nicer than you “need to.” What do I mean? I like the notion of renovating a unit so that it’s one (reasonable) step above-and-beyond comparable units in the same neighborhood.
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Benefits of a Nicer Place
#1: Potentially Higher Rent / Lower Vacancy
Imagine that all the other houses on the street have white appliances and plastic tub surrounds. You offer black appliances and 4×6 ceramic tile around the tub. The added cost is negligible – perhaps an extra $1,000 in cost differential. But it allows you to charge an extra $25 per month.
Within three-and-a-half years (at roughly 92 percent occupancy) you’d recapture that upgrade, and anything additional would be profit. If the lifespan of your appliances and your tile job is around 8 years, you’d capture five years of additional profit, more than doubling your initial investment.
Okay, that’s a decent reason but – in my opinion – not a very compelling one. You might be able to get a better cash-on-cash return in an alternate investment. Besides, setting the rent is more an art than a science. So let’s move on and look for other reasons, as well.
#2: Lower Vacancy
In the rental business, almost nothing is more expensive than vacancy. (Okay, having a terrible tenant is more expensive, but that’s another article for another day.)
Reducing vacancy rates is a bigger motivator, in my opinion, than raising the rent. If slight upgrades shave your average vacancy rate from 10 percent down to 8 percent, the upgrades are well worth it.
Of course, you won’t have a crystal ball that allows you to know how your upgrades correlate to your future vacancy rates. You might know the current vacancy rate of your home and of the comparable market, but you won’t know what the future holds. So I generally look at a “one month” rule of thumb – meaning I’ll spend one month’s rent making a unit a little bit nicer than the comparables.
If a $1,000 upgrade on a $1,000/month unit lowers your vacancy by just one single month, that averted vacancy will compensate for the added expense. Anything else is a bonus.
Vacant houses are also less likely to get broken into, robbed, and vandalized. So reducing vacancy also reduces the risk of losing your profit due to crime. Think of it as an alternate type of insurance premium.
#3: Better-Behaved Tenants
What if you can’t raise the rent, and vacancy rates are too intangible for you to wrap your head around? Then here’s my third argument: You might attract higher-quality tenants.
You’re probably familiar with something called the “Broken Windows Theory.” The theory states that if a window is broken in a home, people will continue to trash the home in the future. In other words, if a property looks marginal, people will treat it with disrespect. But if a property looks fantastic, people tend to be more careful with it. They treat it with a greater degree of respect.
The Broken Windows Theory is another reason why I prefer to give my units slight upgrades, the kind that make them a little bit nicer than the neighborhood competitors. I want my tenants to see their home as a nice place to live, and treat it accordingly. I’m trying to set an example, establish a norm.
Again, I’ll repeat the caveat that I’m not suggesting that you over-improve a property. Don’t put Bosch appliances in a war zone.
But a fresh coat of paint, a hearty power-washing, swapping out the carpet when it looks old and frayed – I encourage most landlords to do this, especially if your properties are in more stable neighborhoods with decent tenants. (If your properties are in a war zone, I’m not sure what to tell you.)
Photo: Jeremy Levine Design