Passing on the Costs of Rental Improvements
Often tenants will ask for an improvement or landlords will decide to make some improvements between tenants, the Costs of Rental Improvements must always be factored. Doing so has a number of benefits, including improving the rentability of a property, increasing the property’s value, reducing maintenance costs, and helping to retain quality tenants. That said, when these improvements are made, landlords should calculate the costs of the improvements and pass them on to tenants through increased rental prices.
What Improvements Should Landlords Consider?
Capital improvements are those that add value, prolong the property’s life, or help to create new uses for the property. Examples of capital improvements include adding a new roof, installing new windows, or building a pantry. In many cases, capital improvements will reduce maintenance costs, make homes more efficient, or increase the rentability and resale value of a home.
That said, some improvements will add more value to landlords than others. When thinking through improvements, it’s helpful to think about the increased return that improvements can bring. A new roof, for example, can substantially improve a property’s curb appeal. This makes the property more appealing to tenants and helps landlords attract future tenants. Additionally, this is an improvement that can reduce emergency maintenance and help to lower maintenance costs.
Other improvements that help to increase rental property returns include landscaping improvements, which similarly help to attract tenants by improving the curb appeal. Planting flowers or shrubs, adding walkways, and adding exterior lighting can all help to add value to your rental property.
Additionally, new flooring, adding square footage, and updating appliances are all improvements that can help bring in higher rents while also reducing maintenance costs.
How Should Landlords Calculate the New Rental Value?
Most landlords are very familiar with how to calculate their ROI or return on investment. This is a calculation that is generally done prior to purchasing a property to gauge whether a potential property is a good investment.
There are a number of free online tools that make this calculation easy, but the basic calculation is simply taking annual rental income and subtracting from that all expenses, which generally include insurance, taxes, mortgage payments, and any maintenance costs. Once you’ve calculated your annual net profit, simply divide that by the money you have invested in the property to get your annual ROI.
When tenants request improvements, landlords should think about those improvements in terms of annual return. If an improvement is made, it will likely reduce the net profit. To avoid this, landlords should calculate the cost of an improvement and then increase the rent to maintain a similar annual rate of return. For smaller projects, these expenses might be spread out over a few months, whereas for bigger improvements expenses could be spread out over the course of a few years.
When considering improvements that tenants ask for, landlords should calculate expenses and rent increases and then discuss this with tenants prior to making the improvement. For example, if a tenant wants a deck added, you can offer to do so with the understanding that rent will increase by a certain amount every month. All parties can then make an informed decision about whether or not to move forward with the improvement.
When contemplating improvements between tenants, landlords should go through a similar process and calculate what the new rental value of the property needs to be to cover the costs of the updates. Landlords should then determine whether this will be a competitive rental value in the area and make an informed decision about whether or not to go forward with the project.
Conclusion on the Costs of Rental Improvements
In many instances, improvements are a good way to ensure that your property is kept in good condition, that you’re able to attract and retain tenants, and that you’re reducing maintenance costs. They can also be an effective way to keep good tenants happy and in your property. That said, improvements can have a substantial impact on your annual ROI if not passed on to tenants. Avoid this mistake and lost profits by passing on some of the costs of improvements to tenants.
For help with this process or to access more tips to help landlords maximize both efficiency and profits, visit ezLandlordForms. Our resources and local experts can answer any questions you have and make sure that you’re an informed and successful landlord.