How to Avoid Renovation Mistakes on Your Rental Properties

by | BiggerPockets.com

If read thoroughly, this article should offer immense value at my expense. I’m wrapping up a renovation in which I just made plenty of mistakes. The rental looks great, but in turning over the unit, I upgraded unnecessary components that simply won’t add to cash flow. I went a bit too far with additional costs in order to modernize things. My future tenant(s) will be lucky as a result. Allow me to explain how the situation arose. I’ll be sure to include pictures along the way.

The Tenants Move Out

My former tenants rented the unit for nearly three years. In my past article, I referenced an REO – this is the one for $85,500. It has been a great investment, but the husband had offered me a deal that ultimately led to a money drain. He was a handy guy and was doing a renovation in an affluent neighborhood, and mentioned that the granite and cabinetry being pulled out of the kitchen were in great condition. My ears perked up. I love upgrades. He offered to pull out the old cabinetry in my unit and place the “new” stuff in there in exchange for one month’s rent.

Ummmm, new kitchen for that? Deal.

This Wasn’t the Bargain

The cabinets looked terrific in pictures once installed, but for some reason, the granite simply didn’t look right. I hadn’t gone to the unit yet. Instead, I was being sent progress pictures on my phone. Big mistake. Lesson learned? Trust, but verify.

The cuts of the granite weren’t the same width (they must have come from different sections). They were pieced off, leaving seams everywhere. It looked terrible. The contractors I brought in refused to touch or fix it. The original formica had already been damaged in removal, so going back to the original countertop was out. I can see the cash flow riding off in the sunset in my mind.

As a result of this charade, the tenants and I mutually agreed to go our separate ways. They had two dogs, so the carpets in both bedrooms had to go. Let this be a lesson that if a deal sounds too good to be true, it usually is. I had to buy new granite for a new tenant. This isn’t how to operate a self-managed rental properly.

Remodel Time

For some strange reason, I find satisfaction in doing some of the work myself. The unit was now vacant, with the original laminate floors and worn baseboards. My thought process churned: I’m already redoing the bedrooms, might as well go all the way and tile it all.

The condition was pretty much original from when I had purchased the unit from the bank. It was about to change drastically. The carpets had been been torn out. There were holes everywhere from paintings and artwork. It was time to get to repair work and my arch nemesis … popcorn on the ceilings. I single-handedly scraped the popcorn off of the entire unit and patched all of the walls and prepped for paint. I consumed two full audiobooks in the process, so it was a win-win.

Getting Out of Hand

The decision to put porcelain tile down in the whole unit wasn’t a mistake. I love the durability of tile and the maintenance savings for landlords. But don’t fret, the mistakes are coming. I found a gorgeous cost-effective porcelain tile at Home Depot and ordered it for delivery. I called in a contractor to lay the tile. He agreed on the labor costs of $2.25 per square foot (a pretty good price, FYI). The conversation unraveled into disaster:

Contractor: We are putting in all new tile. Would you like to replace the vanity in the guest bathroom?

Me: Yeah; no point in having an old vanity on beautiful new tile. (Mistake)

Contractor: Would you like to put in a new toilet, too?

Me: Yeah, might as well. It will look more polished. (Mistake. So unnecessary.)

Contractor: The guest bathroom vanity looks a bit old too. Want to just do that and the master toilet as well?

Me: If I’m doing everything else, let’s just go ahead. (More cash flow just evaporated.)

Contractor:  The base boards… do you want standard, or the nice tall ones?

Me: That sounds like a personal challenge. Get me the nice ones. (OK that’s not what I said, but you get the point.)

The Finish Line

The chandelier was almost required at this point. In turn, replacing the rest of the fixtures became necessary from fear of an eye sore. The granite was a choice I found at a steep discount from a past business, so that was a score for me. Overall, the baseboards, the vanities, the toilets, and the fixtures were completely unneccessary and didn’t add enough value to produce the same amount of cash that I put into it.

The cabinets and countertop were a judgement mistake I made when presented with a deal from a tenant. In the end the unit looks great, but now runs the risk of being damaged by new tenants. The lesson here is that rental units are not a landlord’s home, and shouldn’t be renovated as such. Cost mitigation is crucial to a fruitful cash-flow venture.

A tenant is ready to move in at $1,450 per month, and neighbors have offered to purchase the unit, but now I need to make back the cash I just spent. Do not make the mistakes I made. Analyze and simply fix and repair units for maximum cash flow. Aesthetics can get landlords in trouble. Lesson learned.

Have you ever gotten carried away with a renovation?

Share your experience in the comments below!

About Author

Gus Ross

Gus Ross is a managing member of Ownup Capital. An accredited investor with goals of expansion, Gus is always evolving strategies for acquisition and analysis of properties throughout the country. An avid reader and seeking to learn and grow everyday, he has ultimate goals of philanthropy, business, and personal growth. A visitor at local REIA meetings, he is always seeking to network and meet investors and align goals and interests.

Ownup Capital

29 Comments

  1. alex abanto

    great article same dilemna im gonna have in the very near future..Original kitchen particle board. Original bath,,vanity tub etc…I have a price point in general and want to get my money back i guess in 2 years with increased rent, I have a hard time figuring out how much i should spend dollar wise..is it 5k can i get away with 3k?. definately dont want to spend 7k problem is once we stat these costs add up..any advice would appreciate it

    • Angelou Masters

      Use tile or durable laminate when possible and stay away from carpet. With tile or laminate if a piece goes bad or breaks you can just replace that part and move on to the next tenant. I use a charcoal grout for tile the neutral colors look nice but always end up black anyway. Paint everything the same color with a semi gloss sheen that way you can just touch up the paint when the tenant moves because semi gloss paint is very durable and can be wiped clean in most cases .And by painting all the rooms the same color you will always have paint that you can use instead of a storage room full of miscellaneous colors. Buy cost effective name brand faucets and tub valves not the cheapest generic brands. With the brand name at least you can find replacement parts and the will not break as easily. If you can afford granite or quartz for your kitchen and bathroom counters go for it, the cheaper stuff will suffice here and is just as durable plus you can always buy remnants or search the bone yards at your local supplier. Durable materials can be found for very good prices and will decrease your turnover cost and keep money in your pocket!

    • Gus Ross

      Thanks for the comments Alex, ya it certainly is a tough call. It’s something called the House Money effect and tends to effect our decisions. The best route in my opinion is to form a strategy prior to starting and stick to it.

  2. David Roberts

    I just do not agree. There are some amazing investors that have been on BP podcasts that rehab to flip level and rent it, be all in at 75% of arv, then cash it all out. Not only do you get all of your money back, but if you screen for the best tenants that want a wonderful place like you now have, then over time they hopefully stay for many many yearrs and take care of it. So that 10% vacancy that every investor accounts for yearly will go right in your pocket. Because things are new, the chance of beinf calledover there is drastically reduced (time save for you).

    We have adopted the model of other investors that do it this way, and we have absolutely amazing tenants that never bug us and keep the houses in great shape.

    What market are you in? I wish you the best!

    • Gus Ross

      Thanks for your thoughts David. My main goal is to provide value by giving current and future investors insight into potential problems and help avoid them. Your route can certainly be a correct one. Thanks again for your insights.

  3. Ryan Schroeder

    Certainly mistakes were made in your renovation…we all make them; however I have a different take. In my early years I did things quick and cheap…had to as cash was tight. However, I wish I had found some way to do things right! Now, when I’m doing a renovation I make sure I take care of all future problems. That often means new plumbing, new electrical (I now run only 20 amp circuits instead of 15 in the old days); I tear out any carpet and put in tile or wood flooring, all new cabinets and stainless appliances (5 burner stainless gas stoves aren’t that much more expensive than cheap 4 burner Hotpoints over the long haul). All new light fixtures and the like. As a result I have acquired much better and much longer term tenants. Of course I wouldn’t do this in a C or D neighborhood.

  4. Anna M.

    Thanks Gus for sharing. I have saved this article as a reminder to myself for doing the same thing. I since know better and try not to get caught up in the whole trying to “modernize” everything that I will in the end not see a ROI. “rental units are not a landlord’s home, and shouldn’t be renovated as such.” Very, very valuable lesson learned on my part too. “Aesthetics can get landlords in trouble” You can say that again, because of it I am still working to pay down what is left of the debt incurred and I will not make that mistake again.

  5. Cindy Larsen

    Gus,

    In My Humble Opinion, the amount of rennovation and quality of materials used to make cost effective decision depends on your investment strategy. If you are a long term buy and hold investor, then using high quality materials will pay off over time in increased rents, decreased wear and tear (good tile vs good carpet for example), decreased labor costs (it costs the same to install cheap materials as to install quality materials, and, if chosen carefully, they will last longer, and not have to be replaced as often).
    If you are flipping a property, it makes more sense to use materials that look nice, have a medium price range, and are not necessarily durable: as long as it looks good enough to make a nice profit, it is good enough. This is why I prefer to buy properties that need renovation vs already renovated properties where I will receive the results of someone else’s renovating decisions, and pay more for those renovations than if I did them.

    For me, the key points in your article are that you made decisions based on emotion, without thinking through each decision and doing good due dilligence. I have done that too, and have found it to result in costly mistakes. I try to take the time to sanity check my decisions: why do I want or need a particular rennovation? What is the cost/benefit? How long will it take to pay for it out of my capex budget? Will it increase rents? Why do I think so? Will it decrease maintenance expenses or decrease future capex expenses? Why? I try to qualtify everything I can in order to see if what I want to do makes sense.

    One thing that makes sense to me is to compare the cost of each item with
    the number of months of current cash flow it represents, and also with
    the increase in cash flow it will result in times the number of months you intend to hold the property. For example if it costs 6 months worth of cash flow, and will result a in 2% rent increase (which could be a 10% cash flow increase), and you plan to hold the property for 5 to 10 more years, then it is obviously a good thing to do. That rent increase, of course, also increases your cap rate, which increases the value of your property when you eventually sell it. The capex expense is a one time hit that will not appear on future income/expense statements.

    I also like to take advantage of accelerated depreciation to help offset the capex expense. If you can get your contractors to break up the work into seperate work orders of labor/materials that are less than $2,500 each you can depreciate all of them in full in the year they are purchased. in addition to that, I like to pay with a 2% cashback credit card (and the pay it off immediately, of course). That cashback is not regaurded as income by the IRS: it is a discount. Disclaimer: I am not a financial advisor nor a tax professional, so check everything I say, especially with the tax law changes.

    CJ

  6. Justin R.

    The big problem, in my experience is that, “I can’t have an old ugly X with a brand new Y” dilemma. In many ways it’s true – tenants notice the old vanity when the floor is new … and they would have no objection if the entire bathroom was equally dated.

    At this point, I pretty much always renovate whole rooms for exactly that reason.

    Median income, but high rent market on the coast.

  7. Hunter Fitch

    I wholeheartedly disagree with this article. I didn’t get into this business to be a slumlord. Go above and beyond expectations with your repairs and you’ll get tenants that go above and beyond to take care of your property while paying the renovation costs via raised rents.

      • Kyle K.

        Not necessarily Karen. Hunter may or may not realize this but the most successful multi-genational private enterprises, over the long-term, share Hunter’s idea of shrugging off scoter-term pennies for longterm dollars.

      • Kyle K.

        Not necessarily Karen. Hunter may or may not realize this but the most successful multi-genational private enterprises, over the long-term, share Hunter’s idea of shrugging off short-term pennies for long-term dollars.

      • Karen I think it might be possible that you work in a different segment of the rental industry than Hunter (or myself) and have a different business model and experiences. Things can vary drastically with different community characteristics and business models. ie: California vs midwest vs New York; rural vs suburbia vs satellite small towns vs downtown areas; laws, ethnicity, ideology, age of population, general family size and structure, community values, employment, income, education, etc, etc, etc . . .

        Per my experience I have to agree with Hunter 100%

        Perhaps Hunter has found, as I have over my 15 years of landlording, that in his area if you provide nice homes (not necessarily the latest or greatest, but truly nice), screen thoroughly and select high quality tenants from a highly filtered pool of applicants you really CAN end up with rents paid a week early every month, tenants that take care of your property like it was their own and very few calls for problems.

        In my world, good tenants are hard-working, usually very particular people and want nice places in nice neighborhoods with good schools and other things that interest them nearby. There are also some who want NOTHING and NOBODY nearby. They’re all different individually but also seem to have a common theme. They have usually worked hard to get where they are in life and realize others are trying to do the same so they are far less prone to neglect or destroy other people’s property. They don’t have the ‘entitlement’ mentality. Better than 90% of my tenants in my particular case (rural small town properties) since I switched from renting minimally rehabbed, dated or generic, junky properties to nicely rehabbed homes have actually left my homes in – at the very least – the same condition in which they moved in. Carpets clean, windows washed, stoves/fridges/sinks and cabinets clean, bathrooms sparkling, minimal nail holes in walls, toilet paper on the roller and bulbs in the sockets, yards taken care of, etc…. Late and unpaid rent are long-ago memories and the police don’t have any idea where my properties are anymore because they never have to go to one.

        I’m not a big player by any stretch of the imagination. 10 properties, all SFH. My homes do NOT have all new cabinets, granite, plumbing fixtures, appliances or other stuff. They’re just VERY NICELY fixed up – usually keep most of whatever was there already with high attention to every detail when prepped to rent. I do almost everything by myself or an occasional assist from a handyman friend. ALWAYS fresh paint (some have wallpaper here and there because it fits their period theme), electrical up-to-date and lots of circuits/outlets, plumbing as perfect as I can make it, EVERYTHING CLEAN and ALL broken or questionable things repaired or replaced – 100% – EVERY time. I rehab with a ‘theme’ (like you might find in houses featured in magazines like BH&G, Cottage Living or Old House, etc.) – usually pick the most prominent and expensive thing I’d have to redo if I tore it out, see if I can upgrade it to meet today’s standards and expectations for that style of ‘whatever-it-is’ (usually a kitchen or bath but not always) and then work from there to make the rest of the house all ‘fit’ together period-wise/style-wise/etc. Make it nice as I can but watch the $$$, usually would do my own home with higher quality stuff, but NEVER use cheapo crap. You have to remember, some folks like the very latest things out there, some like ’50’s-60’s style, others like Victorian, etc. but ALL like clean and sparkly! And if they find they can rent a home whose style fits their tastes and fulfills a dream today instead of having to wait until they can buy instead of renting another generic white walled, tile, laminate, OSB and granite box that looks just like the one next to it while they wait these folks go wild! That’s who I rehab my rentals for and who I market to. I don’t like everything I do. I don’t like everything I see in those magazines neither! I don’t have to as long as somebody does.

        In a Nut:
        Be particular when I acquire. Evaluate what’s there and what I could do with it. Target rehab to a theme and evaluate costs and market for that type property. Run the cashflow numbers to make sure it makes sense. Get it Ready as best I can with the $ that make sense for that property. Then Aim & FIRE!

        Learn to AIM your ADVERTISING for each particular home to people interested in that THEME STYLE, learn to SCREEN and BE SELECTIVE, PROVIDE the BEST you can reasonably do with the cashflow you’ll have to work with on that property, Learn to SCREEN and BE SELECTIVE, have a clear strong LEASE AGREEMENT and SYSTEM to manage, learn to SCREEN and BE SELECTIVE!

        Did I mention you need to learn to SCREEN and BE SELECTIVE? Don’t be afraid to leave a property sit empty for a month or two or even more while you screen. If you choose the right Tenant they’ll be there for several years or more so you end up with less actual vacancy time overall, less time lost in tenant screenings, your property will be better cared for so fewer repairs over the long-term, and best of all, less drama in your life! In my world, I think being particular has usually more than made up for any lost rent while finding my best tenant.

        I will sell a property instead of rent it if the right person comes along, either outright or with a Lease/Option (might be something to consider here Gus). So far only a very rare event but always a consideration. You never know until you actually get there what can happen so you just have to be ready and do whatever seems best at the time.

        There were some things I gave up when I switched from minimally maintained and cheaply decorated ‘generic’ rentals filled with irresponsible, judgement-proof, entitlement-minded tenants who often were one flat tire or ticket away from not being able to pay the rent with their accompanying drama that sucked every minute and drop of energy out of my life. You too might miss having turn overs and vacant units every year (or less), always with repairs required and the stench from the trash left behind or the rotting food in the freezer that thawed when the power was shut off a month before you got possession making you gag as you drag it out to the dumpster you had to rent. You might miss scraping the maggots out from under the fridge or sink. Then there’s the bathroom stuff. I worry sometimes that my skills at quickly repairing holes the size of adult human silhouettes in walls are fading. You might also miss being on a first-name basis with the local police and child protection agency caseworkers, the thrill of hearing the latest excuse for not paying rent when due, late notices, evictions, lawyers and their fees – and court dates.
        I was afraid I’d miss all that too, but relax, eventually the memories will fade and you’ll get over it and find other things to do with the time. Best part is you’ll suddenly seem to have extra cash to do those things with!

        Did I mention you need to learn to SCREEN and BE SELECTIVE? I learned – but it was painful and expensive!!!! : 0 : )

        Just some reflections on my experiences in rural mid-America. Yours will be unique to you and will probably be different, perhaps far different, depending on your setting, experience, education, financial situation and lots of other things.

        Hope someone out there at least gets a little something to reflect on from my experiences and maybe even to improve their business model with.
        HAPPY & SUCCESSFUL 2018 EVERYONE!

  8. John Murray

    Newbie renovators will make mistakes. I’m a journey level trades guy and have skills beyond most flippers and BRRRR people. If you want to make maximum money use vinyl plank flooring, rough sand hardwoods and re-coat with oil base polyurethane. Replace toilets, faucets fixtures, P-Traps, lighting fixtures and re-coat laminate counter tops. make sure there are GFIC receptacles and understand how they work, if you cant fit all the conductors in a single gang box replace with a 2 gang. Install CO and smoke alarms were required and make money. If you do this you and complete all the work yourself you will become a multimillionaire.

  9. John Barnette

    Surprised nobody has discussed what really matters a lot IMHO. How does the competition stack up? Potential renters are likely shopping online as much as possible and are comparing available alternatives that match key needs. Namely location, bedroom count, price. Then the “other stuff” comes into place for attracting the tenant you want. I always shop like a perspective tenant and view other similar type listings for lease. Online and in person. Always prior to an actual vacant unit but also to stay on top of the market and rental rates. I am a Realtor by day job..so likely a function of that “hat I wear”. You want to offer a place “appropriate” to the location, price range, and the competition. Overly fixed up and remodeled may not maximize cashflow in the current market if the big three criteria don’t support a higher price. But also don’t want to be the laggard as you will be stuck with the laggard tenants. There is always that balance of material quality. You get what you pay for. But maybe not cash flow what you pay for. Durability and longevity though. I tend to use high quality paint for even budget starter type places. Why? Better quality paint needs fewer coats, less labor, and holds up better. Satin finish or higher luster too. Over time it ends up being cost saving. Does a place rent for more with better quality paint. No. But watching the expense side over time.

    I have also found a difference in my mixed portfolio of SFR and apartments. Sfr tenants tend to stay much longer and be higher caliber tenant. Even in less fancy zip codes. So can budget accordingly for upgrades and rent ready maintenance. My apartments turn much more and seems like tenants are most drawn to price and clean. Does not need to be fancy. So I guess you can say I budget more for style and amenities for sfr and durability and cost minimization of known turnover for apartments.

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