Overbuilding for a rental?

Question

Hey BP!

I just picked up my first rental property (Richmond, VA).  Since my experience to-date has been rehab only I'm fearful of overbuilding.  There are three items that I would appreciate the group's input:  (1) appliances that I should provide vs. tenant & (2) should I replace a dilapidated deck; (3) vinyl vs. tile in kitchen/bath.

For some background, I bought the property for $30K and plan on a $20K rehab budget.  I would say the immediate area is predominantly Class B; most rentals (2/1) go for ~$700/month.  Section 8 tenants is a likely outcome.

(1) Appliances - I was planning to provide a refrigerator and electric stove.  The debatable items are washer/dryer and built-in microwave.  Even if I don't provide a built-in microwave, should I add a 20amp circuit for the tenant (we have to upgrade service and move panel regardless so "the hood will be up").  [note - I'm brushing up on Section 8 requirments which may force my hand]

(2) Deck - There is a deck present but its a hazard so I have to demo (its beyond repair).  The property has a private backyard (fenced) with steps to the house.  I can replace the deck for $3500.  The question - will I get a return on my incremental investment?

(3) Vinyl vs. tile - I have to install new flooring in the kitchen and bath.  Clearly vinyl is the cheaper option and one that's on par with similar homes for rent.  That said, will I be replacing vinyl due to damage as tenants rotate out.  Tile is more durable but costly.

Thanks in advance for your input,

Chris

Trevor Ewen · Answer

@Chris Landrum

Welcome. We purchased a duplex in Richmond a couple months back. We're rented, and I can tell you a bit about what we've learned so far in regards to your questions:

1) Washer/dryer and microwave are just things you have to replace if they break. I do like @Jon Deavers idea about the dishwasher, but I do think you have to look at it from a perspective on capital expenditure. With a property in this part of the market, appliance CapEx will end up being a high percentage of your expenses if you can't control it. I would go with the minimum and see what problems develop. You can also use new appliances as a chance to justify a rent increase in the future.

2) Jon has the right idea here as well. You won't make anything from the tenant on this, but it could come back later from a buyer. There's no reason to play all your cards up front, and your buyer is not likely to show up in the next year. Do what's required, wait it out, see if you like the investment. The thing may be such a pain you're aching to get rid of it with or without a deck. In that case you're likely to sell to another investor, anyway. You can always put it back in a few years.

3) Vinyl. This type of tenant is high on turnover costs. You want to find the best ways to minimize those. I think the point about the floor water damage is important. I say keep your upfront low and adjust as it goes. If vinyl is the wrong calculation, you can do tile later. If tile is the wrong calculation. you're stuck with the high upfront cost.

Best of luck. We have tenants in a similar (slightly higher) range. Section 8 is very likely, but definitely a good thing from a perspective of stability. Do reach out if you need anything.

Shera Gregory · Answer

One more point on the flooring. When you say "vinyl" vs tile I think you mean sheet vinyl. You should check out LVT or Luxury Vinyl Tile. As Jon says, you can pull a vinyl tile and replace just that part of the floor if it is damaged. The LVT feels warm under foot and looks great. Don't go with the peel and stick type. Use one that requires an adhesive. There are some that don't require grout and still have a grout-look because there are two beveled edges. You can use the same in the kitchen as in the bath to save on overage costs.

I have rentals in the price point you are targeting but have not had Section 8 tenants yet. The "Section 8 Bible" recommends to not install anything that could break that the tenant will then expect to have replaced including a dishwasher.

You can always add a deck later on if you decide it's a good investment for the area. At the rent level you are at it's more likely that deciding whether or not to accept dogs with the fenced yard is going to make more of a difference to the prospective renters. I know that's a whole different topic. Some people will never take dogs due to the possible damage. I've found that renters tend to stay longer when they have a good place for their dog because they know that's harder to find. So I usually say "pets considered depending on size and temperament". Of course, everyone thinks their dog is an angel so I will consider size of the dog mostly.

Chris Landrum · Answer

Great input by all - thanks much for your comments!  I'll let you know how this goes over the next 1-2 months.

Chris

Jim Adrian · Answer

I would go with tile in the bathroom for sure.  If you are tiling this yourself, go to a tile supplier and look at there closeout products where you can get tile for $1 per sf range.  You will need to know how much sq ft you will need.

Jon Deavers · Answer

@Chris Landrum

Hi Chris! Happy new year! Congrats on the acquisition. Here are my two cents:

1) I would upgrade the service panel regardless, especially if you're already in there "under the hood". As technology develops, you will need the additional amperage sooner or later so may as well head off the costs. As far as the microwave, I would let the tenant purchase or bring a counter top model. A dishwasher would be a better investment if you're going to add anything (and could help cut down on pests versus letting neglected dishes accumulate in the sink before hand-washing).

2) The deck would be more of an equity play. Richmond is a unique market where almost every part of the city is in a different part of revitalization. So the location of your property is going to be a critical factor here. You probably wouldn't get the return back from your tenant, but it could help you rent more quickly (depending on the neighborhood) and would add some value to resell if you ever liquidate. Could always do this down the road.

3) Tile is a lot more durable but the nice thing with vinyl is if you get sub-floor damage under the sinks or toilets (which is likely with long-term rentals) it's a heck of a lot easier to replace sections of sub-floor by pulling up a few vinyl tiles versus busting up ceramic and grout. The tile provides more protection against said water damage, so it's really going to come down to your budget/tolerance for the repairs.

Best of luck with it!

Milan Blooms · Answer

@ Chris Landrum: The deck may not increase the rent amount. Consider the recent comparable rentals. If they rented without a deck, you may not need to make that investment.

In terms of tiles vs vinyl. Checkout your local home improvement stores (Lowes, Home Depot etc.) they may have clearance tiles that could be priced competitively.

Cheers!

Milan

Shawn Thom · Answer

Do not do a deck.  A deck in section 8 is just another thing to stuff junk under.  Plus you will always have to maintain all the railings around it etc.  if you replace with steps know that section will require railings depending on how many steps it is.

Once you know all your key components are good like AC, foundation, plumbing etc and you still have money, I'd do tile assuming you know you have a stable foundation.

Jairus King · Answer

Hey there Chris!

Congrats on picking up your first property. I have one located there as well and am working on a second. I'd be curious to hear how things worked out with section 8 so please keep us posted as I am not familiar with their requirements, but would love to hear about it. With that being said:

The biggest question without knowing too much about the property is.........Does the ARV suggest that you can get your money back? You will certainly overbuild if for example the property is only worth 55K and you have blown that much or over in purchasing and rehabbing. Determine how much the property is worth and then try to keep your leverage. One thing you can do is simply bypass section 8 all together until you feel like your ready to deal with that. In regards to your other questions.

2) You will have to do something about the deck if it is a hazard. You can eat that cost up front or simply demo it and rent it to someone other than section 8. When you make your money back..Then consider adding it.

3.)  I generally go basic tile, simply because it last longer. Again this all depends on how the numbers look to you. It there isn't anything that "needs" to be replaced ...Hold on it..It is an investment and you want your property to attract good tenants, but prioritize the work and then do what makes sense in the budget.

One tactic that I do is stagger my upgrades and work. I get all the basic and must-do items completed first. Once my tenants are in place I deliver a letter showing the quarterly work to be done. A house always has something that could be done. It seems to go well with them because they know I am taking pride in my property. Generally they find less to complain over because they know in a few months something else will be maintained, checked, updated, swapped.  Just my 2 cents man good luck!

Overbuilding for a rental?

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