Boost Your Rental Returns with These High-ROI Renovations (Rookie Reply)

Ashley :
Let’s get your questions answered. I’m Ashley Care and I’m here with Tony j Robinson.

Tony:
Welcome to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now, today, guys, we’re dive in back into the BiggerPockets forum to get your questions answered and listen, the forms are the absolute best place for you to go as a rookie to get all of your real estate investing questions answered by tons of experts. So today what are we going to discuss? We’re going to talk about the projects that might give you the highest ROI on your fix and flip, how to convert your short-term rental to a midterm rental or a long-term rental and how to know which strategy will work best for your portfolio, and then what options do you have to exit out of a bird deal. So let’s get into our first question.

Ashley :
Okay, so I’m in the BiggerPockets forums and the question I found here is what’s the one renovation you’ve found to bring the highest ROI return on your investment in your fix and flip projects? So Tony, you’ve done more flips than I have, but what is something that you are doing in each of your flips that is bringing you value and giving you a better return?

Tony:
We’re probably unique because a lot of our flips have been turnkey short-term rentals. So we’ve kind of had to balance between ROI from an after repair value perspective, which is what a usual flipper thinks about. But then we also have to think about ROI from a revenue perspective as a short-term rental. So maybe I’ll talk first about the short-term rental side of things and then we can kind of zoom out to just general flipping and what that looks like. But from a short-term rental, what we’re really looking at is what are the amenities or experiences that we can add to try and make our property outperform the other potential options that guests might have in our city? And we just recently added an in-ground pool to one of our properties, and that was a pretty big expense. We’ve seen a good return from it. We’ve converted a lot of garages into really cool game rooms and we’ve seen really good returns on doing things like that. Even smaller things like a bassinet or a high chair, things that people need as they’re kind of saying at a short-term rental. So when we’re looking at the Airbnb industry, we’re not just thinking about the value of the home, but what can we add that’s going to allow us to charge the highest dollar rate on a nightly basis?

Ashley :
Okay, so Tony, how much money are you actually investing? What is the cost of adding these things to your property?

Tony:
It’s going to vary, right? I mean the pool that we just put in, that was about a hundred grand, but after that was our first time we’ve built our own pool. We learned a lot through that process. Now I know we could probably do it for about 60 grand if we would’ve maybe shopped around and chose some different options. The garage conversions to game rooms we’re typically spinning between 10 to 15 K to do those, and that’s labor, all the stuff that goes into it as well. So it varies a ton, and I know people who put gyms at their property and that’s going to be several thousand dollars. I have a friend who bought, I think he spent like 15,000 bucks on real arcade games to go into his game room and it was like the cars you can drive when you’re at whatever, Dave and Busters.

Ashley :
Oh cool.

Tony:
So you can get his extreme or crazy as you want, but for us, we’ve done as little as a couple thousand bucks all the way up to six figures. Now,

Ashley :
I guess I could talk about the long-term rental side and then we can kind of go into the flip side if we’re flipping a property. But for long-term rental, we’re looking for durability for return on our investment when people move out, we don’t want to have to replace the carpets, we don’t want to have to replace the countertop. So we’re finding the most durable material that’s going to last the longest and that’s going to be tenant proof as you may call it, so that it’s a long lasting. We also want something that is going to stay in style for a long period of time. So we don’t want the newest and greatest whatever cabinet color is the best right now. First of all, we would never do white cabinets in an apartment. I think maybe we’ve done it twice in a couple of apartments, but other than that, we kind of stick with just a basic standard wood look or a gray look, something that isn’t going to get a ton of marks and stuff like that and get scuffed up very easily, but also something that can kind of be timeless for a little while and match many different things.
So that’s definitely one, or I guess two things is durability of the materials that we’re using to last long and also something that’s not going to be in style right now, but next year it’s going to be out of style. Nobody’s going to want that look in their kitchen or their bathroom.

Tony:
I guess if we look at just the general flipping side, Ashley, I think a lot of what we said both for the short term and the long term kind of applies to if you’re just generally flipping a home as well. But I think what you really want to focus on is what are the comps in your area support? Because every neighborhood’s going to have, I think an upper limit on how much that home is going to sell for it. It doesn’t matter how nice you make it this area, this city is only going to support X. So I think looking at the comps to really see, hey, what is it that they offer? And then trying to identify how you can pull those things back into the property that you’re flipping. So for example, we just wanted our contract on a flip. We’re supposed to be closing, I’m thinking in 10 days or so, and it’s actually a cabin we’re not going to sell as a short-term rental.
It’s just going to be a second home for someone in this town. And as we were looking at the comps, there’s one that’s sold, I dunno less than a mile away, very similar square footage and bedroom bathroom count. But what we saw with that property, that was the really cool selling point, is that it had this really, really nice wraparound deck and our property has one, but it’s a little old, it’s a little beat up. So we’re going to be putting a decent amount of money into that nice wraparound deck because when you’re looking at the photos, when you see what pops, that was just the strong curb appeal of that property. We’re saying, okay, cool, how can we match that? And we’re just always looking at the comp to see what can we take, what do we need? How can we be competitive? And we’re letting that dictate what we put into the actual flip that we’re doing.

Ashley :
Yeah, that’s such a great point as being market specific. So you really need to understand your market and what amenity, whether it’s a short-term rental and long-term rental flip is going to make a difference. Amenity or materials you use. For example, I went out to Seattle before and they do not use vinyl siding. Vinyl siding is cheap. The flippers there are saying like, no, we would never put vinyl siding on a property where literally around me, that’s what everybody uses is vinyl siding. So understanding those differences too, that if I was going to go and flip in Seattle and I didn’t understand the market, I probably would’ve went if I was on my own, I would’ve put vinyl siding because that’s standard in my area and not knowing the difference. So really understanding your market right now for the flip that I’m doing, the biggest thing is having the kitchen and the bathroom remodeled.
That is where the money is at for this market. There’s a lot of older homes in this area that are being sold without any updating. So to find a home that’s been already updated is kind of hard to find. And when they do come available, those are what are selling really fast. So to kind of save money on this flip, we didn’t do a lot with the bedrooms, the living room or the dining room. We cleaned up the hardwood floors, so we didn’t even refinish them, we just cleaned out. My contractor went through and kind of res sanded where scratches were and stuff like that, and then he put a new sealant over it and we kind of maintained the same color of the floors and then we painted the walls, we painted the trim, and then the kitchen and the bathroom is really where we spent our money.
Another area in my market is the basement. So almost every property has a basement and if you can find a way to make the basement feel livable, usable, even if it’s just for storage, but it’s somewhat nice, it’s going to make a huge difference compared to a property that has an old dingy basement. So we put the rest of our money into the basement, we took a half bath and all we did was we took the toilet from the upstairs and put that downstairs. All it needed to do was be cleaned up. We put a new a hundred dollars vanity from Lowe’s in there and we put some LVP, which didn’t cost a lot because it’s so tiny down there. And then we redid the ceiling in the basement and then we’re putting new flooring down and just painted it. And it was not a lot of money, but it’s going to look like you now have an additional thousand square feet of livable space for this property. So that was definitely a huge value add, even though it’s not going to be marketed with that extra thousand square feet, when people come in and view this home, they’re going to see, wow, we can actually really do something with this basement. So kitchen, bathroom, basement.

Tony:
Yeah, actually that brings up a really good point too of either increasing the square footage, which I think is a little bit more difficult because now you’re doing additions, but if you can get more with your existing square footage, a lot of times that can add value to the home as well.

Ashley :
Tony, that’s great. Looking at properties where there is that extra space to add value, because a lot of times people are sighted and they’re just looking at, well, this is a two bedroom house, I need three bedrooms, let’s pass. That’s not in my buy box. Let’s go look at the three bedrooms. So you can save a lot of money by finding, looking at, we’ve had guests on that say, I look at properties where the square footage seems a lot bigger than it should be for only having two bedrooms or three bedrooms, whatever it may be.

Tony:
Last thing I’ll say on the ar v piece is if you can get your hands on a couple of appraisals from your area, either maybe other people who are flipping in that market or if you’ve got an agent that’s willing to share, if you can get your hands on a couple of appraisals, I found that you get a tremendous amount of value by seeing what an appraiser does on a specific property because now you get to see how are they valuing different things within the home. How much of an increased value are you getting for each additional square footage in your lot size, how much additional value you’re getting for each additional square footage on the actual property of the home, the condition, right? Like a condition versus a B condition versus a C condition, whatever it may be. So if you can get your hands on one of those, I feel like that gives you a lot of insight into how appraisers kind of judge things in your market and you can make more informed decisions about what to add, what to remove, et cetera.

Ashley :
We’re going to take a short break, but when we come back, we are going to talk about how to switch your real estate investing strategy if your current portfolio isn’t performing well.

Tony:
Alright guys, welcome back. So our second question here is about short term rentals and medium, medium-term rentals or MTRs. So this question says I have an SDR short-term rental in a resort town, but the city’s new stricter policies have really cut into my revenue. I’m thinking about switching over to the MTR, which stands for medium-term rental or LTR, long-term rental with furniture included in this area. People usually rent for one to 12 months and the rent is 30 to 50% higher than an unfurnished long-term rental. Has anyone else made the switch from ST to MTR slash ltr? Did it lead to more damage to the furniture slash property and ended up lowering your ROI? I’ve gotten an inquiry from a family with a mid-size dog. So Ashley, I guess have you done, because none of my short-term rentals would work as midterm. They’re all in real vacation spots. No one’s really going to these cities for a month or two at a time, but have you with any of your properties done the medium term rental?

Ashley :
Yeah, so I have two short-term rentals that I do arbitrage with. So I don’t own them. I actually rent them and they’re in a 40 unit apartment complex. And the first one I had was always a short-term rental, but when I opened up the second one, I did it as a medium term rental. And what we ended up doing was we got our first booking, we had someone stay for about four months and that was amazing. And then after that we had a little bit of a gap before the next person came in. So what we did was if it got close to when somebody was going to be done with their medium term stay and we didn’t have anyone booked yet for a midterm rental or we still had a month gap, we would fill those in with short-term rentals during that time period until the next medium term person came into that property.
And that actually worked really well using that flexing strategy. So we found out that our, during the fall and during the summer our big months when we have people coming in and staying and over the summer, it’s because we get a lot of contractors that come through here. So we’ve had contractors and then we’ve also had grandparents that will come in and rent the property that want to come and visit their family, visit their grandkids for the summer. So during the summer we’ve actually turned both of those units into the last couple of summers into midterm rentals because we’ve been able to get that during our busy midterm rental season. But it actually has been quite a while since we’ve actually had a traveling nurse in the property. We haven’t even had anyone book as a traveling nurse in probably a year and a half I would say. So don’t think that you’re limited to just traveling nursing. Usually the big stigma of going on to furnish finder looking for traveling nurses, look at other job industries that could be in your area too, that could be bringing people into that area that just need the midterm housing

Tony:
Flexing between short term and midterm. It’s a great strategy if your market supports it, but honestly, it kind of feels like the person who asked this question, they’ve already done the homework, they know that they’re going to get upwards of 50% more rent. It almost seems like their concern is more so around the damage that they said. Did it lead to more damage to the furniture and property ended up lowering your ROI? So Ashley, maybe you can educate me here because again, I don’t dabble in the long-term rental side of things, but with the short-term rental, one of the options that you have is that you can make it a requirement for your guest to purchase damage protection when they book your place. So if someone books, they’ve got to pay a non-refundable fee of whatever, 79 or a hundred bucks, and that covers up to three to $5,000 of damage and it’s right, and if for whatever reason there’s damage, then I get to just bill against that 5,000 that they paid the $79 insurance for it’s damage protection. Do you know if you can, and obviously it’s going to vary from state to state and every state’s kind of different with their long-term rental rules, but do you know at least for where you’d run your long-term rentals, can you make that a requirement for your tenants as well to purchase damage protection when they come into your place?

Ashley :
Honestly, I don’t know. That’s a great question. I know that we’ve had a guest on here from New York and Buffalo, and she actually got her landlord policy to cover damage from her tenant that she didn’t need to even go after the tenant’s insurance. Her own policy did, and I remember her saying specifically that the tenant or the insurance person was saying like, oh, don’t worry, we’ll find the person and we’ll be going after him directly. And I will say from personal experience, having the short-term rental and cleanings all the time and someone not staying there longer, our cleaner definitely has more work cut, cut out for her after a midterm rental guest comes. Just like the place is not taken care of as well. We’ve found from quite a few of our guests rather than the short-term rental guests,

Tony:
They’re settling in and treating it like home at that point, right?

Ashley :
Yeah.

Tony:
But yeah, I guess to the person who asked this question, if the damage piece is what you’re concerned about, like Ashley said, landlord policy, that might be helpful to you. The only reason why I might shy away from that is because sometimes with these insurance policies, there’s deductibles if there’s too many claims and maybe they increase your rates or they non-renew, but if you can kind of put the onus on the person who’s checking in to get their own damage protection and it saves you a little bit of headache, so check with a real estate attorney in your estate, your area, see what those rules are around enforcing that because I know you can do it on a short term. Medium term is a little bit of a gray area, but I think that will be an easy way to make sure that you’re protecting your RO.
I think the last thing I’ll say though, Ashley, and you can speak to this from your midterm stay guess, is that even if there’s a little bit more wear and tear from the medium term rental, it’s typically not going to be to the point where you’re now losing that additional 30 to 50% in extra revenue that you’re generating, right? It’s not like, Hey, I made an extra 50%, but this guess costs me an extra 65% in damage. If you’ve done the homework and you know can get that additional revenue, I’d say don’t worry too much about the damage, right? It’s far and few between and there are ways to kind of mitigate that risk. So if the reward is worth the risk, which in this case it seems like I’m probably pulling the trigger. So guys, we absolutely love talking about real estate and we love answering all of your questions with you and we would very much appreciate if you get the follow button on whatever podcast player it is that you’re listening on, and if you’re on Apple Podcast, leave us a review. The more reviews we get, the more folks we can reach and we’re all about helping folks here at the Rookie podcast. Alright, in our next question we’re going to discuss how to pull equity out of your B.

Ashley :
Okay, so we got our final question from the BiggerPockets forums. I’m looking for some advice on an exit strategy for a bird deal. So buy, rehab, rent, refinance, and repeat. I’ve done this method once before, but this time I’m a bit torn on the best approach I’m looking to buy again in the next six months. So here’s the situation. I own a home in San Diego. It’s currently worth about 1.05 million. Since the A DU is built, I owe 680 K on the mortgage at 4.25% with my monthly payments around 5,500. The property generates 7,500 in monthly income, 5,200 from the main house and 2300 from the A DU. My broker is advising me to do a cash out refinance and to switch to A-D-S-C-R loan. So this is a debt service coverage loan. Then move the property into my LLC. I’m hesitant because current interest rates are around 8% and I was originally considering a HELOC due to these high rates.
Given the high rates, would you recommend sticking with the HELOC or does the DSCR loan make more sense in the long run? I’d appreciate any thoughts or experience you have with similar situations. Thanks in advance. Okay, so Tony, first let’s break down an A DU. So an A DU is an additional dwelling unit that is built on the same parcel as a single family home or any kind of property really. So you have the main house and then you have the A DU that is built. So this could be added on an additional dwelling unit. So it could be like the garage was transformed into an additional unit. Most of the time if it’s detached from the property, it’s a dad do a detached additional dwelling units. So this one we’re going to assume is attached to the property, so it’s kind of like two units here we’re talking about.

Tony:
I guess a few other terms we should maybe define here as well is HELOC and cash out refinance, just to folks understand here, but a HELOC is a home equity line of credit. So think of this as almost like a credit card, but you are pledging the equity in your home as collateral for this debt and you only pay for what you use. So if your balance is zero, you’re not paying anything. If your balance is more than you’re paying more on what you owe, but your original loan stays in place with the heat lock. A cash out refinance is basically replacing your existing mortgage with a new mortgage. So you pay off the old mortgage, you establish a new mortgage, and you get to keep the difference between the old balance and your new balance is cash in your pocket tax free. So those are the two options we’re kind of considering here. And I guess here these options, ash, I mean four and a quarter on the interest rate doing 7,500 from rental income expenses of about 5,500. So he’s netting about two grand, maybe a little less when you take tack on expenses and repairs and maintenance and whatnot. Feels like a pretty good deal.
I don’t know if I see the benefit in doing a cash out refinance when the heloc, because you’ve got a decent amount of equity, there is what, 400 grand almost an equity that you got there. I would probably lean towards the heloc so I can keep that good four and a quarter rate in place. What are your thoughts?

Ashley :
Yeah, so I would like to know more about what your strategy is, what your goals are for the future. So what is the reason you want to refinance? Do you have a plan to purchase another property down the road and you want to be able to use this money as the down payment or you actually want to use this to make a cash offer on a property. So I think that can kind of weigh into your decision here as to what you’re going to do with the money. So one thing to look at first is if you put the property into an LLC and you do A-D-S-C-R loan, the debt now is going to come off of your personal credit and it’s going to go, the LLC is going to now be the owner of the loan and it’s not going to show up on your credit, which is great.
So maybe if your plan is to go and buy a new primary residence and you want to lower your debt to income, then this may be an actual good option for you because it’s going to take away that debt and you’re going to have a higher or less debt to income, which will be better for getting approved for a higher loan rate. So that’s one thing to think about if you are concerned about your debt to income. So the next thing is what are you going to use that cash for? So if you’re going to use that cash for a down payment on a property and then you’re going to go and get a loan. If you do a heloc, you are going to have to make when you run your numbers that the property you’re purchasing can support the HELOC payments and can support the payments to the new mortgage that you got.
And you also want to make sure that the loan product you’re getting will allow you to borrow the money from your HELOC to actually put down the down payment for this next property because sometimes they want to see that you have cash and you’re not borrowing more money to actually go and buy this property. The next thing is if you are actually just going to this 400,000, you have an equity, you’re able to pull that out you and you’re going to get the line of credit, you’re able to use that to purchase a property in full and do another deal with it and you’re just going to pay back the line of credit within six months, then I would definitely go that route. If you’re just going to use the HELOC for a short period of time and then go ahead and pay the HELOC back, that makes a lot of sense to actually do it that way. I have two HELOCs on that covers three of my rental properties and that’s what I use to fund. Pretty much all of my rehabs are those HELOCs and I take the money off to pay for the rehab, and then once the property is refinanced, then I pay the HELOCs back and they sit and I’m not paying any payments while I don’t have a property that I’m rehabbing.

Tony:
He did say at the beginning of the question that he’s looking to buy again in the next six months. And I guess my assumption there is that it is another bird deal. And like you said, Ashley, if that’s the case, I think doing the heloc, leveraging it in the exact same way that you just described is probably the best route because even if we do a cash out refinance, say you get an 80% loan to value, which is probably pretty common for most refinances, maybe because it’s A-D-S-C-R, maybe they’ll let you go a little bit higher, who knows? But say we do 80%, we’re talking just over 800 k is what that new loan balance is going to be. You owe 680, so we’re not even talking about $200,000 that you get back by doing a cash out refinance. Actually, just for the HELOCs that you have, what LTV are they typically allowing you to go to? I feel like I’ve been quoted some that’s like 90%, sometimes even more than that.

Ashley :
Yeah, I honestly don’t know off the top of my head what that was. It’s been several years since I actually took them out. I don’t remember what the properties appraised for at that time and what it was that I got. I know one property, and this was in 2017, I think I got this HELOC maybe 2018. The property appraised for 130 and I was able to get 108,000 for the line of credit, which I still have today. So Tony, whatever the math is on that, I can’t do that

Tony:
Pretty close. But I mean it’s just something to consider, right? Is that you want to also understand how much access to capital that you’ll get because even with the cash out refinance, we’re not tapping into all of that equity. So there’s still some room there, but if I’m this person, I’m probably going the HELOC route using that to fund my next bar.

Ashley :
Well, and two, I think that if the property is in your personal name, you’re going to get better terms than you would if you go ahead and put the property into an LLC. So I would think keeping the property in your personal name is beneficial for funding purposes unless you are actually looking to lower your debt to income and then maybe it’s beneficial to move it to the LLC, then just have an umbrella policy on that property to protect you for liability reasons.

Tony:
I guess the only last thing to comment on HELOC versus cashout refi. Ashley said you got your HELOC in 2017. What was the rate then? What is it now? Ballpark, if you know?

Ashley :
So the rate, this is really sad to talk about the rate then started out at 4.5% and now it’s at 10%,

Tony:
Right? So that’s probably the downside with the HELOC is that it’s a variable rate and it’s going to adjust depending on market conditions. And obviously we’ve seen interest rates go up pretty dramatically over the last couple of years. Had you done a cash out refinance at that time, whatever that rate was that you locked in in 2017, which four and a quarter, maybe a little bit more if you’re doing a refinance, whatever it may be, that would’ve been the rate moving forward. So pros and cons there as well. But I mean you got a four and a quarter on the actual mortgage, I’m probably going to leave that there and not touch it.

Ashley :
Okay, so you guys remember, if you want to get involved in the community, like all these real estate investors submitting questions, go to biggerpockets.com/forums. Thank you guys so much for listening to today’s rookie reply. If you love our show, make sure you leave us a review and follow us on your favorite podcast platform. If you’re watching on YouTube, make sure you are subscribed to the Real Estate Rookie YouTube channel. I’m Ashley. And he’s Tony. And we’ll see you guys on the next episode of Real Estate Rookie.