How to Evaluate if Renovations are Worth It

[David Cherkowsky]

Hi All,

I recently purchased my first investment property and am going through the closing process. The property is a 2/1 that I am considering converting to a 2/2 or 3/2. It is a townhouse and the adjacent property (that previously had an identical interior layout and size) has gone through a renovation to expand the kitchen by approximately 100 sqft, and add a second bathroom.

This adjacent property is currently renting for $300-400 more than what I believe I can rent my property for. It also is worth approximately $140k more than my property is currently worth.

My question: when evaluating renovations, is the math as simple as (Additional rent expected per month due to renovation * 12 months/yr)/total cost of renovation = ROI. Or are there other ways that folks typically evaluate this?

Thanks in advance for the help.

[Bill J Fay]

Yes, your math is correct. Adjust for vacancy with you not being able to rent it out during that time as well. One comp is great, but I would look for another to confirm value. 

[David Cherkowsky]

Quote from @Bill J Fay:

Yes, your math is correct. Adjust for vacancy with you not being able to rent it out during that time as well. One comp is great, but I would look for another to confirm value. 

 Thanks Bill!

[Corby Goade]

I don't have a formula that I use and I'm much less concerned about cash flow than I am equity, although the potential added cash flow in your situation is a really nice bonus. 

If I could add $140K in equity, I'd just want to know how much it would cost me to do those renovations and based on the scope you've described, that should be more than about 8 weeks of work max. Do you have a quote or estimate for the cost of that project?

[David Cherkowsky]

Quote from @Corby Goade:

I don't have a formula that I use and I'm much less concerned about cash flow than I am equity, although the potential added cash flow in your situation is a really nice bonus. 

If I could add $140K in equity, I'd just want to know how much it would cost me to do those renovations and based on the scope you've described, that should be more than about 8 weeks of work max. Do you have a quote or estimate for the cost of that project?

 @Corby Goade I have contractors coming by throughout the week to provide quotes and I am very curious to hear what they are going to be. But agreed, the equity piece here is the enticing piece to me. Assuming the quotes come back at less than 100k (I currently have a baseless number of 50k in my head), this seems like a no brainer, which is why I want to ensure I'm not missing anything.

[Jacob Sherman]

average investor wants to make about 10-15% on the transaction 

[David Cherkowsky]

Quote from @Jacob Sherman:

average investor wants to make about 10-15% on the transaction 

Makes sense. Thanks Jacob.