Upgrades in rental properties

[Delmas Edwards]

I don't want to spend unnecessary money on upgrades in rental properties so what is the standard upgrades in rental properties?

[Chris Mason]

I have a client, that is a newer landlord, that likes to put up fake ads on craigslist a week apart, with and without mentioning an upgrade she is considering ("Pending prior to your move-in: new xyz counter tops"), as well as with or without the rent increase she feels the upgrade will justify, to test the waters before spending any money. Market value is what someone is willing to pay, so why not just go ask some people if they'd be willing to pay your price?

Incidentally, it's not super hard to calculate what works out to be a marginal capitalization rate. I don't think "marginal capitalization rate" is in the standard BP vocabulary, but I believe it should be.

[ monthly rent hike * 11 / cost of upgrade ]

If you do this work in between tenants, it will not impact vacancy and should have no (or a positive) impact on maintenance expenses and carrying costs, so you can just do the super simple calculation above. Multiply by 11 to assume one month of vacancy per year, which is conservative.

$3000 in kitchen work, and an afternoon of your elbow grease that would otherwise have been spent doing non-income-generating activities, to turn a neglected kitchen into an amazing gorgeous kitchen, to bump rent by $50/month? 

$50 * 11 / $3000 = 18% cap.

Would you buy a home with a 18% cap? Hell yes you would. I'll buy anything with a guaranteed ROI of 18% all day, every day.

Why are many landlords hesitant to calculate marginal cap on upgrades? Unclear to me.

Why don't contractors run around pitching to landlords based on marginal cap rate? Hell if I know.

If you want to think like a hard money lender, you are "lending" this home $3,000 at 18%, interest only, with a balloon payment due on sale. If you hold the home for at least 6 years, it'll have paid for itself and it made sense even if the $3,000 upgrade didn't increase sales price (your "balloon payment" that the house owes you) by a single penny. IRL hard money lenders and credit card companies have a hard time finding people or things that will accept an 18% interest rate, and actually pay that 18%, reliably. 

Obviously you will not be disclosing that you're getting 18% ROI on that kitchen to that tenant, and many tenants can't do math anyways or they would be homeowners, so there ya go - someone paying you 18% that doesn't even realize it and might even be grateful for the new kitchen.

Clearly I need to go get into the business of selling kitchen upgrades to landlords, because re-reading that above, apparently I know how to pitch kitchen upgrades that I know literally nothing about... ha.

An appraiser answering this question would likely say something about how it's local to your market. A great heating system is going to go a lot farther for you out in Michigan than it would here in California, and similarly something in the kitchen making it vegan friendly will likely go farther here than it would for you.