Is a Remodel Worth the Cost on a SFR Rental?

Question

Trying to decide if doing an addition will be worth it.  I have 6 rental properties, mostly sfr.  One property comes vacant this month.  2bd,1ba,1car,  768 sqf., worth about 150k.  The neighborhood is turning over with updates and remodels.  Very few rentals close by (at least for now, in winter), but desirable location.

We will do some updating no matter what:

New laminate floor in kitchen/hall

Siding needs replacing (have some insurance $ for that)

Fresh paint

Needs new windows (maybe).

Needs a bunch of concrete work (garage floor, driveway, stoop, walk to door).

With those improvements we should be able to get at least $1000/mo.

A room addition to add a large ensuite Bedroom/bath, and a laundry room to get the washer, dryer out of the garage, the bid came in at 59000 (This includes the siding).  The concrete was another 12000 (high).

With all that, the rent should be $1400/mo. (If we don't try to rent it in December).  There is no current loan on this property, so it makes my head hurt to refi it.  But I am thinking on taking out 120k for all.

Is the remodel a good plan, or forget it and just do the cosmetic stuff?

It has a big back yard, but no room on the side to expand garage.  No basement.  Inherited from parents a long time ago, want to keep, good location.

Love Bigger Pockets and all of you out there!

Thank you all for your help!

Amanda G. · Answer

$59,000 + $12,000 = $71,000at $400 more a month this will take 177 months or 14.8 years to pay for itself. (leaving aside complications of taxes, depreciation, etc)

That doesn't sound like a good return to me.

JD Martin · Answer

Making some unknown assumptions here - lets say 15x15 MBR, another 10x10 bathroom, 5x10 laundry = 375 SF. $60k/375 = $160/sf construction costs. That's pretty high where I live. Does the neighborhood even warrant adding that much SF?

If it were my property, I would do the things that need to be done and leave the rest. Also, saying that you need to get the concrete done anyway and don't have that kind of cash on hand leads me to believe you might want to think about getting some stronger cash reserves or your own lines of financing before proceeding; I've got credit cards with credit limits double that, where I could self-finance those kinds of repairs if necessary, but that's not a big enough hit that I'd have to worry about taking out loans on paid-for houses.

Thomas S. · Answer

Absolutely not worth the expense unless you are going to sell and even then you would likely never recouped your expenses through appreciation. The property as a rental is not worth anything more than cosmetic improvements. Personally I would do the cosmetic improvements and sell it now while it is vacant.

Since you have $150K in equity with a opportunity value of a minimum 10% return although you may be saving the mortgage interest amounting of $625 per month you are losing $1250/month based on opportunity value for a net loss of $625/month.

You are paying a very high premium to purchase perceived cash flow and have actually turned the property into a liability as opposed to a asset.

Your property with rent at $1000/month is far too low for a property valued at $150K and is already negative cash flow when accounting for the artificial cash flow that you are buying with your own cash/equity.

This is a investment property that you should be liquidate.

Sandra Kennedy · Answer

Thank you for your thoughtful responses!  @Grant Rothenburger and @Paul Caputo

I failed to mention that we really need to get the concrete work done and don't have that cash on hand, so will need to finance that much at least.  The concrete is leaning towards the house and the garage drain that the washer drains into may be putting water under the garage floor (4 inch drop along a crack by drain), so will probably have to borrow for that work anyway.  Hopefully will get a better bid.  The 12k was the same bidder on the room addition.

I was hoping to get a second property a room addition, also.  That one would bring in at least another 500/mo with an additional bdrm and bath.  But I needed the bids to be closer to 50k each.  That one is still occupied, so no rush on it.   Maybe we just need more bids.

Paul Caputo · Answer

$71,000 in improvements for a $400 rent increase doesn't sound like a good deal to me. If you were selling all that might make sense, but even then those improvements are almost 50% of the current value. Will that really increase the value by 50%? I'd do the cosmetic stuff now and reconsider the big improvements when you're closer to selling.

Just think if you could use that $71k differently and make more money. Sounds like you could pickup another rental with that cash and be looking at another $800-$1000+/mo instead of the extra $400 on that one.

Grant Rothenburger · Answer

@Sandra Kennedy I would vote no on the addition for renting. But should you decide to sell one day maybe then it makes sense to do.

Is a Remodel Worth the Cost on a SFR Rental?

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