Does Renovation Make Sense in this scenario?

Question

Looking for Advice:

I have a 1000 sq ft,  2/1 with garage and sunroom property that I bought for $30K a while ago and has been rented out for the past 6 years.  I am getting $1,100 a month.  I refinanced the property couple of years after buying and pulled out $75K and put in about $38K in repairs (net $37K).

The last hurricane (FL) took out some of the windows in the sunroom and is currently boarded up.  Bathroom and kitchen need renovated, has never been updated.  Kitchen is very small (about 50 sq dt).  The garage currently houses a half bath, laundry space and doesn’t have a ceiling.  The house has crawl space and garage doesn’t so it sits lower and has two stairs from the house to enter the garage.

I am looking to renovate this property and was hoping for some advice/insight to see how much I should spend on the renovation.  Thinking about return on investment.  It will take years to recoup the money spent.   I definitely need to redo the sunroom and a new roof is due very soon.  I was thinking of either:

• New roof, converting the sunroom into a bedroom and updating the bathroom and kitchen- around $25k - will get around $400 more monthly - 5.2 years to get money back

• New roof,  extend the kitchen into sunroom and update, update bathroom, refinish garage and add a bedroom, update garage bathroom to full bath - around $45K - $650 more monthly - 5.7 years to get money back.

Or should I just fix what’s broken and leave it be?

If you have read this far, thank you! =)

Jon Puente · Answer

Hey Sheena,

Going off of the 2 options you have presented and having never seen the property myself, please take my opinion for what its worth.  I would probably go with Option 2 for a few of reasons -

1) It looks like remodel #2 adds more value, both in monthly rent increase, but also long term appreciation, and the time to recoup your money is relatively the same (both in year 5).

2) You mentioned the kitchen is very small, so if for whatever reason you decided to sell this property prior to year 5, you would have a lot more buyers excited with a bigger kitchen, rather than a 50 sqft space. Kitchens matter a lot to families and I dont think just updating it provides enough value.  It needs to be bigger.

3) Doing a more in depth renovation also opens doors up to STR and MTR, not just LTR.  It looks like you are in Florida and I know that market is hot with STR, so a really nice renovation could actually yield more than you are predicting if you get creative. More risk, more reward! (Although renovation is not a huge risk in this case because you already plan on doing it!)

Great Question!

Sheena Varghese · Answer

Thank you @Jon Puente and @Devin James for your replies and insights.  I appreciate your feedback!

Devin James · Answer

Hey Sheena Varghese,

Im with Jon Puente.

Option 1 will give a better initial cash on cash return. But option 2 seems like it will be a better ROI when accounting for value added, appreciation and the ease of selling in the future.