Is This A Good Rental Investment? Part III: What Repairs Will This Place Need?
Even an otherwise-excellent investment property can become your Kryptonite if it needs too much work or you spend too much.
We’re assuming by now that you’re reading this because you’re looking into becoming a real-estate tycoon and you want to know whether that rental investment you’ve got your eye on is likely to be worth your time. We’re also assuming that you’ve ready Parts I and II of this little mini-series. If not, get back there and check them out first.
OK, so: you’ve got a building in a good neighborhood, and you’ve run the numbers and they look promising. It’s time to get down to the nitty-gritty details: what is it actually going to take to get someone moved into this structure?
The first rule is to have a budget predetermined based on the numbers you’ve run to determine if this is a good investment. Now let’s look a bit closer at determining what you’ll spend some of that (as little as possible) budget on.
What Repairs Are Necessary?
We recommend you start with the local municipality and find out what requirements they have. Nothing’s worse than being almost finished and having a city inspector knock on the property door, post a cease & desist order and make you undo a bunch of work so they can inspect it and require you to pull permits.
We also recommend hiring a professional home inspector before buying a property. The $200-$500 they charge is money well spent as not only may they uncover deal-killing issues, but their report will give you a game plan for what needs to be addressed.
Your biggest challenge will be separating what you think the property needs versus what the market will pay for. Putting in granite countertops may be your preference and will probably get you a tenant quickly, but will you be able to get enough additional rent to offset the cost?
What Repairs Will Improve Your ROI?
Once you figure out what has to be done, you’ll want to figure out what repairs will improve your Return On Investment (ROI). This is where a great property manager can be of assistance! If you prefer to go it alone, get on Craigslist and go visit some competitive rental properties. Gauge what they have versus the rent they’re charging. Usually the two most important rooms to focus on are kitchens & bathrooms. They give you the most bang to your ROI, as just about every other room is just a “box” that needs paint and flooring.
Be conscious of the materials you plan to use. As pointed out above with the granite, you have to make smart business decisions on what to install. Assume tenants will ruin certain things requiring consistent replacement – carpet, paint, doors and screens.
Budget carefully and don’t spend money you don’t have to.
What Repairs Can You Afford?
This is where many first-time investors fail miserably. If you’re truly a first-time investor, the first decision is what repairs are you comfortable making versus hiring someone to make? You can always do it cheaper yourself – in theory. If you’ve got the tools, friends, and chutzpah to renovate the place using your own elbow grease and ingenuity, you can actually do a lot of it fairly inexpensively using places like the Habitat for Humanity ReStore and similar resources. The reality is mistakes may cost you more in materials and if you take twice as long to do something as a professional contractor you’re losing potential rental income.
No matter if you do it yourself or hire it out, keep in mind the general rule is akin to Hofstadter’s Law: repairs and renovations will always take longer — and cost more — than you expect, even if you take this rule into account. For example, you expect to put up new drywall in a room for $800, but when you rip out the old drywall, you find mold. Not only do you need to kill it off, but you may even need to re-frame some of the wall if the wood is dry-rotting. Suddenly, you need an extra two weeks and the cost went up to $1200.
That extra two weeks translates into more property taxes, mortgage costs, insurance costs, and other similar expenses on the property and delays the time before a tenant can move in and pay rent — so it hurts even more than it looks like it hurts.
The long and short of it is, if your property isn’t one that you can afford to renovate and renovate to what the rental market expects, no matter how else it’s looking otherwise, it’s not going to be one that you can rent or lease for an acceptable ROI.