How Do You Know It’s Time to Renovate – And Will Improvements Allow You to Raise the Rent?
Landlords typically clean carpets, repaint and make minor repairs when a tenant moves out and before a new tenant moves in. At some point, however, addressing normal wear and tear just isn't enough to give a rental the facelift it needs. In that case, it may be time to consider a serious renovation.
How much work should a landlord perform to update a rental property? And, will the work merely keep a unit competitive, or do upgrades merit a rent increase?
The project scope, feasibility, timetable and return on upgrade investment each require careful consideration before taking a plunge into an overhaul of an investment property.
Will the work be cosmetic, structural or both?
The amount of work you undertake depends on the age of the unit and the date of the most recent upgrades. A home that hasn't been updated in 20-plus years may need a systems overhaul, especially if it has been a rental property for much of that time.
Plumbing and electric should be evaluated by a professional for wear and compliance with building codes. The life expectancy of a roof ranges from 15 years to more than 30, depending on the materials used. Older homes also tend to have less efficient heating and cooling systems. Windows and doors, and inadequate or worn out insulation, allow heat to escape.
Once any structural repair and replacement needs are established, it's time to make an honest assessment of the unit's appearance.
Compare your rental to nearby units, and ask yourself how it measures up to properties that are renting for more than you currently charge. Do the more expensive units offer more storage? Are hardwood floors refinished? Do they just look nicer from the outside than yours? If so, consider cosmetic improvements, especially those that modernize kitchens and baths.
Improvements that boost natural light and open up rooms will put your rental in a completely different category than rentals that are dim or appear crowded. Typically, opening up a floor plan requires removing a wall, or walls, and rethinking room layout. Yet, opening rooms could be a matter of merely adding lighting, removing window treatments to let in natural light, decluttering or downsizing any furniture included in the rental.
Can You Afford to Renovate?
Remodels can be funded with money you've set aside through the years for just this purpose. Otherwise, if you've built up enough equity to borrow against your rental property, and loan payments fit in the budget, then it's time to shop loan rates.
Be sure to factor in the loss of rental income, both during the renovation period and over the time it takes to advertise, screen applicants and get a new tenant.
Don't try to save money through buying cheap paint, flooring and other materials. Rentals must be durable enough to withstand the frequent moving in and moving out. Although many tenants will treat your unit with care, others will slam doors, ding walls and scratch floors. Choose materials that will last through heavy use.
The next step is to get project estimates. Nearly every landlord will put in some labor on his or her investment property, even if it's simply carting debris to a Dumpster. However, unless you are a tradesman, or know one who's willing to closely supervise, save the big projects for the pros. You'll control costs by fully discussing the project in advance, setting a time line with your contractors, and having them sign a contract that includes discounted fees for work that is not performed by deadlines.
Decide on a schedule.
Flexibility is key. Some rooms simply require more time to remodel than others. Rather than hoping the work will go faster, plan on the project taking slightly longer than estimated. And be ready to adapt when delays, or opportunities, come up.
A Pittsburgh landlord began overhauling his four-unit property in the city's North Side when it was clear that the 1960s build was no longer competitive with other rentals in his neighborhood. Among other changes, he updated fixtures and laid ceramic tile floors in the kitchens and baths. He replaced sliding glass doors off balconies, refinished hardwood floors, added storage and updated light fixtures and switch plates.
He planned to spread the project over two years, both for his budget and because it had to be planned around vacancies. Midway through the work, however, the sister of a mutual acquaintance moved to the city for a new job. She needed a place that was a little less than going rent and wasn't picky about amenities.
The Pittsburgh landlord made a calculated decision to delay upgrades on one of the units. He agreed to rent it to the newcomer for $775 a month, more than 20 percent less than the $1000 he was charging for upgraded units. He also included a clause in the lease that laid out a schedule for repairs. This alerted the tenant to expect regular visits that involved noise and inconvenience.
The landlord's flexibility benefited all involved. Delaying upgrades on one of the units postponed costs, and maintained rental income. It also allowed him to work at a more casual pace, which would be important if he encountered unexpected work elsewhere in his building.
To get a head start on work, you or your contractor can start applying for building permits before units are vacant and ready for remodeling. Having permits in hand will eliminate paperwork delays.
How much more rent?
When investor and blogger Paula Pant finished a major renovation project, she raised the rent by 40 percent – from $750 to $1,050 – but found she was still undercharging. She realized this when she was flooded with tenant applications.
So, she boosted the rent to $1,150 the next time the unit was vacant. She still received overwhelming interest before selecting a tenant. Finally, the next time it was vacant, she advertised the rent at quite a bit more – $1,750 – and then dropped it a little each week until she was fielding between five and 10 inquiries a day. The new rent is $1,490, nearly double the original rent before renovations.
Not all landlords will see that kind of rent increase, but Pant put more than $17,000 into her unit. More often, renovations will run between $5,000 and $10,000, and rents will increase between 10 percent and 30 percent.
There are limits on how much the rent can increase. No matter how expensive the remodel and no matter how beautiful the unit looks in the end, tenants must be able to afford it and must want to live in your rental neighborhood.
Track nearby rents throughout the remodel process to see what comparable properties are charging. If your unit is truly better, try a higher rent, but be willing to come down in price if applicants aren't biting.