ROI: Rental Renovations Well Worth the Money

As the demand within the residential rental market remains strong—as does the popularity of HGTV’s “DIY renovation” and “fix and flip” programming—real estate investors and landlords alike have reinvested some of their profits back into their rentals. The end goal of diversifying one’s investment portfolio with residential rentals is to generate long-term, sustainable cash flows while taking full advantage of market appreciation. Fundamentally, every landlord, regardless of size, sophistication, or strategy, is looking to do two things: minimize vacancy and increase rents. What better way to attract quality, long-term tenants than with occasional property refreshes such as new paint and landscaping?

As competition continues to grow within the marketplace, landlords are having to work harder to attract quality tenants. Renovating dated assets is a great way to differentiate one’s rentals while appealing to a wider audience of potential tenants. Improvements—big and small—can greatly effect an investor’s bottom line, supporting rent increases and accelerating an asset’s appreciation. Not all renovation dollars yield the same returns. The secret is to identify where your rehab dollars go the farthest. When improving an asset, it is important to consider one’s return on investment (or ROI). Some improvements increase an asset’s values more than others. Consider your capital contributions and timeline; often, a superficial refresh (e.g. new paint or cabinet hardware) can provide equal or greater appreciation dollar for dollar than a more expense kitchen remodel for one tenth of the time and cost.

On the light side of renovation—and well within the “do it yourself” category—investors report the greatest returns when dedicating their efforts to cosmetic fixes and updates. There are many easy and inexpensive cosmetic fixes that can make a big difference in how well your property shows. This includes repainting, replacing old or worn-out blinds, changing out yellowing outlets and outlet covers and putting fresh caulk in the bathrooms. A weekend trip to the local hardware store could translate into a few hundred dollars more in rental income.

When considering more comprehensive construction, investors must be even more cognizant of their ROIs. However, money is rarely wasted in updating kitchens and bathrooms. Kitchen and bathroom updates don’t just sell houses; they also “sell” rental properties! A modern, up-to-date bathroom or kitchen can give your property a competitive edge. You can redo these rooms without spending a ton of money. Resurfacing the cabinets, adding new fixtures, and updating the paint or flooring can make a big difference. Consider installing clean, durable hard-surface flooring. Not only does hardwood—or a more cost-friendly laminate—look more modern than carpeting, it’s also easier to clean and can reduce your long-term maintenance and turnover costs.

But if you’re anything like me, an overzealous trip to the home improvement store inspired by a HGTV marathon or an over-crowded Pinterest project board, can quickly derail a cost-effective rehab plan. When investing in your rentals, resist the temptation to purchase cheap or low quality materials. It is important to remember this is a long term investment. To reap the full benefit of your “sweat equity,” upgrades should be durable and neutral enough to appeal to the majority. Conversely, avoid wasting your money on expensive, luxury upgrades or in replacing appliances and fixtures that could be cheaply repaired. Italian marble, crystal chandeliers, and Sub-Zero appliances may be beautiful, but they likely are not appropriate or appreciated in a rental targeting younger audiences. Careful consideration should be given to the cost, appeal, and timeline of your prospective rental renovations.

At the end of the day, there is a lot to be said for curb appeal. At the very least, a clean, bright, and well-maintained rental will make a good impression on prospective tenants.

CoreVest is a leading provider of financing solutions to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions. For more information about how CoreVest can help grow your rental and rehab business, please call 844.223.2231 or submit our contact form.