Real estate investing is an amazing opportunity, but it’s a business! There are people who are out there remodeling houses and units and making them way too nice or way too slum-like. Many people have great intentions when they begin renovating a rental property, but you have to remember that the unit will be lived in by many tenants and not all of them are going to respect the rental. At the same time, you want people to live there and enjoy living there, so not making it livable enough is equally as bad.

CFK 078- How Much Renovation is Too Much?

On this week’s episode, Dr. Matt discusses the business side of renovations for your rental properties. It’s hard to know where to draw the line on the renovation. You don’t want to spend too much money making the rental so nice that any damage done by tenants is extra costly, but you don’t want to do so little that no one wants to live there.

Tips for Renovating an Investment Property

  1. When renovating a rental property, do not use your emotions! Your rental is not your personal home. It is a home for someone who may not live there for more than a year.
  2. Depending on the neighborhood you buy the rental in, is how much renovation you should do. If you buy a place in a D neighborhood, the rental units shouldn’t look be so nice that you are paid less than the renovations would cost. Location matters and a D neighborhood means the rent cost is going to be very low. If you spend $20k on renovations and the rent is only going to be $500 you will be getting a return of less than 15% and you will not recoup your renovation money for many years.
    1. If you only do 10k worth of renovation to make it livable and still receive $500 a month in rent (because location will decide your rent rate more than the “niceness” of the unit) you are getting a 25%+ rate of return.
    2. Extra tips for renovating an investment property: there is a higher likelihood that a tenant in a c- and below neighborhood might mess up parts of the rental. The counters or flooring might need replacing after the tenant leaves. If you get a new tenant every year and you have a really nice granite countertop that you might need to replace every year, that’s 4 or 5 thousand dollars a year.
      1. Or the counter is worth 4 or 5 thousand dollars and it will take 4 or 5 years worth of tenants to pay for the granite countertop that might need replacing every couple years due to neglect from the tenant. That’s not a great situation either.
  3. Here’s another anecdote for you to consider when thinking about renovating a rental property. If you buy a unit with a tenant already living there, but the tenant is paying rates below market rent, you might think you should renovate to get rid of the tenant and get market rates. The property is already livable and making a nice profit.
    1. If the tenant is paying $800 a month and market rent is $1000. Is it worth it to get rid of the tenant, put $10K in renovations in the apartment to get the extra $200 a month in rent?
      1. You have a couple of options, you could not do any renovations and speak to the tenant about their living arrangements and if they would be willing to pay market rent.
      2. OR you could see if they would be willing to pay market rent if you fix a couple pain points (like a new shower or toilet in the bathroom) that will only cost you $1000 in renovation.

After the Dust Settled

The main thing you need to remember as tips for renovating an investment property is location matters. You should renovate to the same levels of the surrounding units and houses. Don’t make emotional renovations because you are not living in the house and your needs are not the tenant’s needs. It has to be livable and enough to make sense with what the market rate is.

If all of this makes sense and you are thinking about renovating some rental properties but are not sure the numbers make sense, feel free to reach out! I am available by social media, messaging, email, and we can even schedule a call if you need it.

If you love the returns of real estate investing, but don’t want to deal with any people, you have the option to be the bank. You can be part of a trust or a fund. Right now, I have a fund set up for accredited investors with over $5 million in assets. The fund has preferred interest and 70% profit sharing. Visit me at investwithdrmatt.com to find out if you have the opportunity to invest with us.

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