How much to spend in renovations if rent would go up by $200?

Question

John Warren · Answer

@Ali Ahmed you should always ask yourself several questions. Will the granite really give you a rental bump? In some markets it will, while in other markets it will not. Will the pop corn ceiling removal really give you a rental bump? Again, these are unnecessary cosmetic repairs that may or may not give you a rental bump.

I think most investors think in terms of how many months to recover your capital. As others have indicated, 4 years to recover your capital ($2400 per year X 4) is not terrible. This is especially true if you are able to get a much better quality of tenant. You should also consider whether the upgrades will last the full duration of the cash flow bump. Carpet, for instance, probably will not last more than 4 years. Tile and granite probably will.

Robbie Young · Answer

I think people did a good job of replying to monetary reasons on this post, BUT there are a number of non monetary considerations.

Will it lower my future expense costs because you are going with a longer lasting product.

The most important consideration in my opinion is will your better product and higher rent result in a better class of tenant?  My cheaper properties have tenants that are more likely to be late and more likely to damage my house compared to my nicer more expensive houses.  The lower headache factor may make it worthwhile to spend a little extra in some situations.

David Stumpf · Answer

@Ali Ahmed Additional 200/ month (2400/year) on a 10k investment would be a 24% cash on cash return.  I would definitely do that.  Also replacing carpet with more tenant proof tile will lower cap exs.  Just be sure your rents will increase that much but I think it's dedicated l worth it.  Get started on it soon though.  You're 12 days into the month and still getting bids.  From here to the rest of the year you have school starting, holidays, and winter weather,  all of which tenants don't tent to move as much.

Danny Randazzo · Answer

@Ali Ahmed run your ROI analysis and also figure out your goal for the property. Are you going to own it for the short term or longer term because you may want to make the upgrades if you can attract a better tenant to interact with. Also, how do the improvements impact the asset value? For example, $200 per month is significant for a 150 unit apartment but $200 a month for a SFR or duplex won’t increase the assert value since its based on comparable sales. If you have a smaller property see what comps have sold and how your improvements impact valuation.

Anthony Freeman · Answer

What did you do to calculate the $200 increase in rents?

Adah N. · Answer

Hi Ali, reviving your 2 year old post. Curious about the renovations you made? Did you get the rent and ROI you were seeking?

Bruce Petersen · Answer

@Ali Ahmed

Yes there is a formula; you take the anticipated rent increase, in your example we will assume $500 for the math, and multiply by 12 (returns are always calculated annually); take that number and divide it by the cost of the project ($10,000) and you get your ROI (return on Investment).

Formula is:

annual increase / project cost = ROI

Now, you have to decide what return is worth it for you to undertake the project. Keep working the numbers with different inputs to get answer that works for you.

Side note, do a detailed market survey to support your thesis or it could blow up in your face and only test one unit at the beginning, for an apartment complex that is.

On the granite, when I do this myself I am seeking effective cost when figuring project cost so I take the cost of the granite itself and then figure I won't have to resurface those counters again. In an apartment complex I will turn a unit roughly 2 times in 5 years. If i usually have to resurface on every turn or every other turn, I'll assume every turn for my properties (each property and tenant base will be different). I then subtract the cost of the resurfacing from the cost of granite as I should recognize those savings due to installing the granite, this gives me my effective costs. Granite should also speed up the unit turn time as it will take a day to do the resurfacing. I love doing granite or quartz if my sub-market will take it.

Hope this helps.

Bjorn Ahlblad · Answer

@Ali Ahmed We have been doing light rehab in our 12 unit and raising rents by 150-200 dollars/mo. Our objective has been to make each unit much more presentable primarily by completely repainting and replacing flooring as required-usually a combination of carpet and VPL. You can spend a lot of money in bathrooms and kitchens; out focus has been to make those areas as presentable as possible without any real money involved.

You can spend a lot of money rehabbing units and you need to have a plan covering what you are spending to get how much return; otherwise you end up over improving and wasting money. We did not spend more than 6k on any one unit; but admittedly some of the monthly rent increase was just bringing everything up to market. In addition we spent some money replacing the coin operated washer and dryer and did some painting in common areas as well; again nothing serious.

You really need to become the expert on what other LL are getting from their apartments before you decide on what your rehab budget is and just how deeply you intend to dive to get maximum utilization for your building.

How much to spend in renovations if rent would go up by $200?

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