How much renovation to do?

Question

We just purchased our first rental  property, a 4-unit, all 1bed/1bath, coin laundry in basement, and 4 car  garage in the rear.  I would put it between a B and C class.  It's working class, and OK Public Schools.  Crime rate is not high, from my research.  Rent in B area, which I say is B, because it's closer to popular malls, restaurants, movie theaters, is about $25-$50 more than the area our property is in.  The area of our property is about a 5-10 minute drive to the B area.

We purchased it at $86,500, about 80% of value, instead of 70%, but I think  long-term, we will be ok.  The rent is currently $435, and market is $500.  I will be updating the units, and  raising the rents  to $500.  Numbers were about $100 per unit, coming it  at  $411 total cash flow, after PITI, 10% property management, 5%  capital expenditures, and 5% Maintenance.  Unfortunately, I left out the  common electrical expense in my planning, which is coming in at  ~$50/month, and insurance was a tad more than I expected, so cash flow  once I bring the units to market rent will be about $350, even with $16K  in maintenance and improvements (general property and each unit).   Interest rates also went up a 1/4 percent.  I'm hoping to get back to  $400+ cash flow by driving down the water bill, and maybe the electrical  as well.

Maintenance on the property has been kept pretty well, but we need to replace:

-minor landscaping-Concrete in rear parking area, in front of garage (~$5K)-one plumbing drip; planning to defer replacing galvanized plumbing with pex in years to come, probably 2 years-roof is not new, but is not leaking, estimating 5 years of life left, so will replace at that time, or hopefully later;-electrical   at some point.  It's Armored BX cable, but on fuses panels, and it's  60  Amps of service to each unit, and 30 Amps (might be 60, but there  was a  30 Amp fuse present) for the common (hallway and outdoors lights,  as  well as furnace, washer, and gas dryer).  From my research, this   electrical is not hurting anything, as long as the fuses are replaced   with the correct fuse, and the wiring is ok, but it did drive the   insurance rate up a little, and limited us on insurance company options   as well.  Insurance was about $16 more with the company we went with.    Other companies would not cover it at all; Some were ok with fuses, but   needed 100A service, and others were NOT ok with fuses, but were ok  with  60A service.  The prior owners said they replaced two fuses in  about 15  years, so I guess the 60A per unit has been ok, even with  electric  stoves.  They are 1bed/1bath though, so 1-2 people per unit  max,  probably helps.

The rent is currently $435, and market is $500,  including water and heat paid by me.  I will be updating the units, and  raising the rents to $500, but I have one vacancy I want to testing trying to do a bit nicer than market, and list it at $525.  Nothing else is $525 in this  neighborhood, but nothing else may not be as nice as what I would  prepare also.  Let me know what you think.

Here are pictures of the property, and the vacant unit.  Let me know what you think on improvements:

Front of Property

-No planned changes, except for trimming lawn from now on

-https://thumbs.trulia-cdn.com/pictures/thumbs_5/ps...

Living Room

-No planned changes.

-Carpet  is in good condition, so was thinking of keeping that, but there are  hardwoods underneath, which is great, but I'm unsure of their condition.

-I was thinking of replacing the oak trim with white, but to  save cost, I think I will try and compliment it with black door  hardware, like door knobs and hinges

-https://thumbs.trulia-cdn.com/pictures/thumbs_5/ps...

Kitchen

-I  wanted to replace the cabinets, but they are real wood, and I have been  talked into refinishing them, using the sanding, priming, and painting  type of method.  I will replace the cabinet hardware with chrome, and  re-position it to a lower area of the cabinet, instead of mid where it  is now.

-I will leave the granite counter-top.

-I will replace the appliances with stainless steel.

-I wanted to go Luxury Vinyl Plank, but was talked into keeping this, since it is in good condition.

-There  is a vent just above the stove, on the wall left of the stove (you  can't see it in the picture) which I believe is supposed to be for  exhaust from the stove, but it does not have a fan in it.  Any ideas on  adding a fan to it?  The is grease residue above the stove/bottom of  cabinet, so something to pull the stove exhaust out, would be better.

-https://thumbs.trulia-cdn.com/pictures/thumbs_5/ps...

Dinette area, opposite of above Kitchen picture

-Remove  the old yellow phone plate from the wall, replace window if it has Lead  paint, and maybe add Board and Batten, to draw separation between the  Dinette area and Kitchen, though it's the same room.

-https://thumbs.trulia-cdn.com/pictures/thumbs_5/ps...

-http://blog.homedepot.com/diy-board-and-batten-wainscoting

Bathroom

-Resurface/Refinish yellow tile to white, and leave the black, as black;

-Leave the floor as-is, but clean and polish, to make it pop a bit more

-Replace  toilet, bath hardware, and sink hardware, partly because we pay the  water, and we want water efficient items to drive down the water bill as  much as possible;

-Replace window if it has Lead paint

-Remove curtain valence :-)

https://thumbs.trulia-cdn.com/pictures/thumbs_5/ps...

Bedroom

-No planned changes

-https://thumbs.trulia-cdn.com/pictures/thumbs_5/ps.97/6/e/e/8/picture-uh=bfef554726567a5541316d342924ad-ps=6ee830b24aa165c59eea61b0f12ee6d6.jpg

Front Hall

-No planned changes

-https://thumbs.trulia-cdn.com/pictures/thumbs_5/ps...

The  other units have older counter-tops, so will update to Formica most  likely, or whatever $700 per counter can get us.  Additionally, we will perform the  same updates above, to the the other units.  We have given a 60-day  notice of rent increase with improvements, and have asked for a 1 year  lease renewal.   2 tenants are 3 year residents, and are month to month.  One tenant's lease is up in one month.  We have offered the opportunity for the existing tenants  to move to the vacant when it is finished in less than 30-days.

Let  me know your advise.  As you can see, I want to go a bit nicer, than  maybe the normal.  Surrounding properties at market rent, look close to  the pictures above.  Some have white trim throughout instead of oak, and  some have replacements cabinets as well.  I have been faced with many  friends saying to not do too much, which I understand, but I got into  this business to not only make a profit (replace my current career in  5-8 years), but do things of good quality, also.  However, most of my  friends are not real estate professionals, so I am looking for you  input, to put into my thoughts also.

Christopher B. · Answer

Thanks.  Two totally different thoughts, but both are appreciated.

On the concrete, there are trip hazards in how broken up the existing concrete is, and I expect an appraiser, when I perform a cash-out refinance, will obviously see this as defective.  I need as much cash out as possible to complete my BRRRR, but I think at least some money will be left in the deal, mostly the repairs/updates.

Board and Batten could be overboard, but it will be like $60.  We will do most of all these repairs ourselves.

Comparable units at $500, are just a tad nicer than our tenanted units.  However, I think we can get $500 for the vacant one.  However, I want $525.  If easily successful at $525, I would increase the other units to $525 after they are at $500 for 1 year.

Thomas S. · Answer

There are two areas of expenses, those that must be done and those that are purely astatic.

The idea behind rentals is to make money not spend money. If a update does not relate directly to a rent increase that covers the cost of the work in additional income within 1-2 years it is a total waste of money.

If market rent is $500 you should be able to go straight to it with little more than a new coat of paint. At $500 rent this not a property worth updating. Clean neat and safe is all that is required.

Concrete at garage will not increase rent, do not waste your money.

Repair plumbing, if it works OK do not replace, it will not increase rent.

Electrical, if it is safe (appears to be) do not replace it will not increase rent.

Living room is cosmetic and will not increase rent. Do the work yourself.

Kitchen, paint the cabinets yourself otherwise do nothing, will not increase rent.

With rent at $500 stainless steel is a waste of money, replace only when they fail with used appliances.

Board and batten, are you planning on living there, if not it is not adding to the rental income.

In the bathroom water efficiency is good but the pay back time is probably not worth the expense of replacing fixtures. Make sure the existing ones work properly. Consider billing the tenants for water.

Keep all tenants on M2M leases unless you want the tenants to control your investment. Better for you and they will not care. NO term leases.

You are conflicted between personal preferences and business. Your preferences are not appropriate in this business. You can charge $500/month now the way the units are, your friends are 100% correct. You need to get your head around the fact that you are operating a business otherwise you will never survive and not replace your present job.

Costs like roof repair are already going to eat up your cash flow don't make it worse by throwing money at unnecessary fluff.  You need a better understanding of our business. Affordable rental housing not lifestyles of the rich and famous.

Jim Adrian · Answer

@Christopher B.

I would entertain the idea of changing the electrical out.  Get a couple quotes.

Kitchens: I would replace the kitchen cabinets.  Look at adding tile backsplash at the counter and the stove.  Its a way to add color and wow factor.   I like the idea of the board and battens.  Find ways to add character.

Bathrooms:  I would not change out a window due to lead paint.  You already have to disclose lead paint if the house is built before 1978 per the epa.  https://www.epa.gov/lead  I would also include asbestos to the disclosure as a "c-y-a". Lead paint will be the first layer of paint on the walls that has been covered up latex now.  Do your research on recoating tile as you may be better off just to tear out the old tile and start over.

Front hallway: Might want to consider tile at the front door due to water / snow.

If the trim work is good just paint instead of replacing.  Create a design plan and repeat it for each unit.  Take a hard look at the numbers as the budget can get away from you quickly.  Factor in 20% for contingency. Always get multiple quotes.