How to consider if a rehab is worth it?

Question

I recently bought a not-too-bad 2b2b condo for 395k at 20% down in West town Chicago that I intend to sell in > 5 years, I intend to live in it for 2 years, and rent the remaining years before selling the property. The total monthly mortgage payment with HOA included sums up to 2,300. There is a 15-25k room for improvement by upgrading the kitchen and both bathroom countertops that would make this place even nicer to live in, but am wondering whether it is worth it from an investment perspective. What data do you use to evaluate whether a rehab is worth it?

For context, right before I bought the property, it was renting $2,600-2,700 and the other apartments of similar size are also renting for the same value currently ($2,600). When I bought it,  I invested ~7k already to upgrade all the oven, microwave, dishwasher, and repainted the walls, with the hope that this will push the rent up. My hope for putting this money down is a 2-3x return, is this realistic? From a rental perspective, how much increase in rent can I expect?

Would really appreciate any insight!

John Warren · Answer

@Sean Anggani I would think about this problem very differently. I would look at the surrounding comps and see how they are decorated. Are you competing against quartz countertops, dishwashers, and in unit laundry? If so, then laminate and dated cabinets will have to go at a discount. Really you have to work backwards to solve the problem here, and having leased both dated and old units and also beautiful new units I can tell you that the beautiful, new unit will also get you the best tenant.

Crystal Smith · Answer

My opinion- Never make any investment based on "hope". Your words- hope this will push the rent up". Make decisions based on data.  Look at recently sold units in your building or within a quarter mile radius that are getting higher rents and evaluate the type of finishes, square footage, type of views and building amenities. Use that data to make a decision on what upgrades you should invest in or even if you should invest in any upgrades.  You can also look at rentals that are currently on the market & compare.

Matthew Irvine · Answer

I'm not sure exactly how you would calculate 2-3x return, I lean towards a cash on cash return when talking about renovations.  If I have a unit that rents for 2,600 and if I invest 12k I can rent it for 2,700, that would be a net gain of $100 a month or 1200 a year.1,200/12,000 = 10%I then ask if I can get more the 10% somewhere else in my portfolio.The caveat here is that the mid term goal is to sell this property, so what do those renovations do to the value of the property upon sale.  Still I would look were you can get the most return on your money today with the assumption that you can always do those improvements down the road.  As for where to get these comps, I look online (zillow, realtor, rent-o-meter, etc.) just get comfortable searching active listings for something comparable.

Sean Anggani · Answer

Thank you so much for the responses everyone! This is all really great advice. So to recap:I should calculate the ROI and compare with where I can get a similar return. @Paul De Luca @Matthew Irvine do you think 12-15% ROI is a good ROI? Honestly it sounds good to me since that is more than what my stocks return.

@John Warren I really like how you are thinking about this, going backwards to solve the problem, I'll do some research!

@Jonathan Klemm my next goal would be to further increase cash flow by buying another property where I can buy >1 unit so that I can live in one and rent the other. Obviously, if there is a better opportunity like a good BRRR I might take it as well

Paul De Luca · Answer

@Sean Anggani

I think 12-15% ROI is a great return on your money.

Paul De Luca · Answer

@Sean Anggani

Look at the rental comps in the area (ideally the same building as your unit is in) that are renting for $2300 vs $2600-$2700 and determine if it makes sense to make the upgrades.

Ex: Let's say you increase your monthly cash flow by $300 by investing $25k into making the improvements.

$300/mo x 12 months = $3600/yr; divide that number by your investment of $25k = 14.4% ROI on the improvements.

Crystal Smith · Answer

Wonderful

Eliott Elias · Answer

Is the time you’re putting in worth the profit?

Sean Anggani · Answer

@Crystal Smith thank you so much for this advice. Because of this, I compared the comparable rents in the area, and saw that rents range from $2,400 for places that are much older and less furnished than mine, all the way up to $3,950 for spectacular premium living spaces. This really gives me much more peace of mind to invest in my place.

Drew Sygit · Answer

@Sean Anggani no one mentioned how this is all affected by market demand.

Was just in Tel Aviv, Israel to meet with investor clients and was surprised how rundown the city appeared - yet streets full of upscale people. Clients told me that they have a housing shortage, so landlords can still get top dollar without having to make improvements.

So, if your property is in a popular area and market demand is strong, why would you make unnecessary improvements NOW? Yes, you may have to make them later if the market cools, but then you can probably get them done relatively cheaper (cooling economy will drive down construction labor) and push wear & tear issues forward.

How to consider if a rehab is worth it?

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