Rental Rehab....Too much or too little?

Question

I am under contract to purchase my first rental and I would appreciate some advice on how to scale a rehab on this property. I have rehabbed houses for flipping but that's a different ball game.  The house is currently a 2 bedroom, 1 bath with 2 living rooms. Its in a transitional neighborhood with little old houses and I think the neighborhood has the potential to be a great neighborhood for young families and young professionals moving to the area. The existing bathroom has enough space to be converted into two smaller bathrooms and the second living room could easily be converted into a third bedroom. Since this is my first rental rehab I though I might reach out to get some advice on if its worth the expense of a reno (10k +/-) or if I should clean up the current floor plan and make the most of it. How do you decide how much to reno in a rental rehab?

Andy Webb · Answer

If it is in your budget, convert it to a 3/2.  You will have an easier time renting it to a family.

Andy

Joey H. · Answer

Thanks for all the input! The house was built in the 30's so its not super big but it is ample and the original living room is a good size. The second living room was an addition so most houses in the neighborhood would not be expected to have 2 living rooms. I appreciate your metric Thomas on how to calculate if it makes since. This will be a long term buy and hold so the appreciation it creates isn't as important as the additional monthly income and it provides. I will be doing a full on reno so the total rehab will cost more that is just the portion that it would cost above what I will spend, +/-. My thinking is that it would attract a higher degree of renter and I could charge 200-300 more/month.

Thomas S. · Answer

When renovating a rental the criteria is always....full payback of Reno cost within two years. Recoup from additional portion of increased rent rate derived from the renovation. If you spend $2400 on a reno it must translate into a minimum $100 per month in additional rent.

Andrew B. · Answer

my first instinct is that it would be a good idea, but to play devils advocate...will there be enough living space if you remove one of those living rooms? you will need a living space big enough for 3-4 people probably to sell it. if not can you add more living space?

Krystle Padilla · Answer

Hi Joey! I currently have a 4-2 near Denton and from my experience, people will definitely appreciate the 3-2. The whole idea is the retain good tenants forever. If you keep it a 2-1 they may expand and leave. Even for my space, I put in more money to make the finishes more higher end than the typical rental because I love my tenants and want them to feel like it is their house. For example, I have granite counter tops, upgraded tile floors, and all of the fixtures are brand new. Depending on your area, I would put in more than 10k since you're doing bathroom and room conversions.

Anthony Hurlburt · Answer

I would do the extra bath and bedroom.  You should easily make your money back in rent and at the end sale.

Thomas S. · Answer

What you need to do is remove your personal feelings from the decision and make your decisions based only on dollars and cents.

From a business stand point the approach should be minimum investment for maximum return. You make the place livable, neat clean and tidy. Get it on the market and kick your business into gear.It's a rental property not a flip.

For some strange reason beginners always seem to lose site of the fact that it is a rental and try to make it as nice as possible. Nice as possible reduces your returns, quick and easy makes the returns you are in business to achieve.

Do necessary repairs, slap on some paint to make it fresh and clean and make it earning it's keep.

You stated that there are 20 properties on the market, none of which are updated, do you maybe think those investors know something you do not. Probably.

Joey H. · Answer

Michael great perspective, very wise! Its always nice to hear from somebody that understands the wild west I call home! For the others contributing to this discussion the primary industry in this area is Oil and Gas and because of that our market is often dictated by the price of oil. When oil is up its impossible to find hotels, rentals or even rv spaces and when its down there is usually a surplus. Historically, when oil would drop so would our market and we had this up and down cycle. The interesting thing is the up and downs of the last few years have not affected our market the way it has in the past. The money funding investments in the area is coming from outside sources as opposed to local banks and individuals funding everything. I would be interested to know how other investors mitigate markets with up and down cycles.

Currently the market is still very active, houses usually sell in a few days and there are only 20 rental houses on the market and of those none have been updated in the last 20 years.

The property actually has an apartment in the back that is leased to a good tenant and its rents will almost pay the mortgage. It's cash flow positive right now but the previous tenants in the main house had to be evicted and complexly trashed the place. At a minimum, it would be all new paint and some work in the bathroom. So i'm going to have to do a minor rehab just to get it rentable to respectable people so my thinking is does it make since to do a little more to make it really stand out? Going back to my original thought, how do you know if you are doing too much or too little......I think in this case it sounds like almost everybody is recommending a little bigger reno for the bigger rents it could produce.

Does anybody have any experience with renovating a little nicer to try to attract a higher caliber of tenant?

Michael Boyer · Answer

Welcome to the world of landlording!

Crazy idea... with oil in the 50 buck range...

Could you rent it out right now as is for positive cashflow? Is it in fair rental condition (even close?). Would cosmetics like paint and flooring get you there? Magic word there: rental condition...

Look around at a few other rentals in the market/vicinity (not for sale but for rent nearby).

The reason I ask is that you are just starting out landlording and with the learning curve, you may get some wear and tear specialists as tenants early on... a few bootleg pets..maybe worse...

Could be tough on a newly redone house with all new finishes, etc. Then it looks dated and worn out again...

You could learn about landlording with a dated unit as long as it is clean and functional...

Then I would actually look to do the full rehab as an exit strategy when I was going to sell (ideally when oil is up and all the hotels are full of six figure workers that can't buy house if they wanted to)...

Or maybe do a fix and rent rehab when you really know more about the process. It may even give you a better idea of durable options you want for a landlord friendly rental (think: less to break/damage)..

Looks like  Lee v. Mojo may be a great rivalry again this year (both still undefeated).. Like old time (Permian 92 grad!)...

Best of luck out in Friday Nights Lights Country!

Kristian Peter · Answer

Hi @Joey H. - Definitely convert the extra living area to bedroom 3, and if you can add bathroom 2 for a reasonable cost, then that will add the most potential value in terms of rental value and re-sale value. After investing and running a real estate brokerage for 20 years, you always want to have at least a 3bd/2ba combination - it appeals to the most renters and buyers.  If you're planning to rent for at least 3+ years, then do the minimum, just carpet / paint.  If you're going to sell within 3 years, then make the kitchen and baths as nice as possible. There is not a magic number for rehabs, but kitchens are always the one place that you'll see the highest return from both rentals and resales (everyone wants granite counters and stainless steel appliances).

Rental Rehab....Too much or too little?

Most Popular Reply