Should I renovate now to increase my rental income?

Question

Hi there,I have 2 rental properties that I was wondering if I should renovate in order to increase the potential cashflow, the issue is that the renovations would be quite expensive and I would have to wait quite a  while before getting a return on my investment..Current situation:House 1: Upstairs= $1200, downstairs=$775House 2: Whole house= $1500Total: $3475/monthAfter ~70K renos (30-40K for each suite, yes it is that expensive - at most 5K less per suite)Future Possibility:

House 1: Upstairs= $1200, downstairs=$1000House 2: Upstairs= $1200, downstairs=$1000

Total: $4400/monthThoughts? Suggestions?

Ryan Scully · Answer

Well...It depends!  (Of course)

How cheap is the money that you are borrowing to do these renovations?  If it is low interest money or cash, you then have to ask yourself

"If I took this 75k and leveraged it to buy something else would I be better off?"

I know all about taking a poor performing rental and turning it a great performer through rehab.  The biggest benefit in my eyes in not the extra money you make in being able to charge more for rent, but the fact that you will be attracting a much "better" tenant.  Someone that will appreciate the work you put into the house and is willing to pay a little more to live in something that has been cared for will most definitely be a tenant that requires less of your time and attention, and will most likely pay on time, and in full, and might even set up automatic payments direct to your bank account.  So when considering the question...Should I invest in the betterment of my properties you must consider not only the monetary aspects but also the "non-tangibles" How much happier will you be with really good tenants in your property versus ones that you can bare.

Michael Seeker · Answer

@Alex Rossol - Another thing to consider is the added value to the property.  Whether or not you can borrow cash to do the rehab, you may be able to recoup all of it or even more by refinancing after it's complete.

Adding $925 in rents would add about 90-100K in value where I invest (maybe more maybe less in your area).  Check to see if there are comps that support the upgrades.  You don't want to spend $70K on renovations to only add 35K in value to the properties.

Alex Rossol · Answer

Oh and I should mention that I had kicked off the whole thought of renovations to begin with since I am refinancing this property with a new lender, and will be getting a new appraisal - currently it's likely it'll be at the same value it was appraised at last time if I don't do any renovations.

Elizabeth Colegrove · Answer

Ryan - My personal plan is to grow as much as possible now. I do not feel that these low prices and cheap money (low interest rates) will exist forever. Therefore I personally plan to grow as much as possible now. Later when growth no longer makes sense I plan on paying debt down and expanding current income flow through renovations. Just a thought! It truly depends on your business plan and your personal comfort.

Alex Rossol · Answer

Thanks for all the feedback so far!

Alex Rossol · Answer

Thanks you for all the replies!@Ryan Scully Interesting take on it, I neglected to see the other options for the cash.  The other possibility for the money would likely be purchasing another house, something along these lines...Hypothetical house 3: $2100-$2200 per month rent, $150-$200 cashflow

@Aaron Montague 1.  Renovations, rough but fairly accurate2.  Renovations would add a bedroom in house 1, and build out the suite in house 2 (+1 bed + 1 kitchen)3.  Yes property manager would be there, so -10% of the $925So I guess now I have 3 options; a) renovate both houses b) renovate house #2 c)Look for and buy hypothetical house #3.

Elizabeth Colegrove · Answer

I honestly would recommend doing house 2 if your can borrow the money cheaply and it would not affect your business plan. Upgrading house 2 would give you the biggest bang for your buck. It would also allow you to see if the area can absorb your rent increase and if you are still attracting the same "type" of tenants. If that works well than I would upgrade house 1 as long as it is not an all or none type of deal. I  a babystep landlord! I just liked to complete the babysteps in rapid succession once I see results ;)

Tom Yung · Answer

@Alex Rossol

I see U are at Edmonton. That area is booming

The question I will ask if the renters in that area will pay the kind of rent after you rehab.

You probably hope for better quality tenants, Will better quality want to pay that kind of rent in that neighborhood. That's the  Question.

Aaron Montague · Answer

@Alex Rossol

1. How accurate are those renovation cost estimates?  Have those been verified by 3 or more contractors?

2. What about the renovations makes the apartments more rentable?  Are they gaining beds and/or baths?  Are the generally getting nicer?

3. How much of that $925/month will be coming your way?  I.e. how much do you pay your property manager? Do you expect your insurance rates to go up?

How much more will the places be worth after the renovations?  The other possibility is refinancing both places and pulling some cash out if they are now worth a great deal more money.  I'm not sure how Canadian appraisals work, but they could use the "income approach" as an easy method of showing how much more the place could be worth.

Here is how I look at your numbers:

You are spending $70,000 to renovated

An extra $835/month (post 10% PM fee) is headed for your pocket

12 x $835 = $10,020 per year

10020/70000 = 14.3% cash on cash return

I would not invest in that because I like my money to be making 15% in RE investments, but if your minimum is 14.3% or lower, it looks like a good investment.

Should I renovate now to increase my rental income?

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