I get this question often from home owners. Do you remodel your property now that the tenant has moved out or do you wait until after the next one? At which point does it make financial sense to spend the money to remodel?
Their are two sides to this problem that I see, one is the cost/return analysis and the second is what is the morally right thing to do? Let’s start with the fun moral/ethical portion.
My company has two rules about the types of properties that we will manage.
#1 If I wouldn’t live there then we won’t manage it.
#2 If it breaks, it will be fixed the soonest a contractor can be scheduled. If that is an issue, we don’t manage your property.
We believe as property owners and managers we have an obligation to provide a safe, functional home to our tenants. We also believe that with smart upgrades and repairs that you will be more profitable then someone who tries to squeeze every penny out of the property by taking deferred maintenance. For you car people that would be the same as skipping oil changes to save money until your car has a catastrophic engine failure and the vehicle is only worth the scrap metal value. Yes you “saved” money on the oil changes but the long run cost was far more then if you had performed the necessary maintenance.
The next logical question then is how much is the right amount. This is where it becomes tricky and fun. What is the least amount of money you can spend for the most significant amount of change? Does the property need new carpets or do they need to be cleaned? Does it need new texturing or a recoat? The same color of paint or a completely new paint scheme? Next is looking at the local market and seeing what they are charging for a similarly priced unit and deciding if the rent increase will give you a return on your investment.
Putting the hypothetical aside, I recommend a remodel when a property will generate the remodeling investment back within two years and a rent increase of greater then $200/20% (whichever is larger). If the property rents for $1300 as is or $1400 after spending 10 grand that means your return on investment is 12% (which sounds great, but let’s talk real numbers) You lose 10,000 on a property to things that will wear out and you lose that purchasing power on adding another property to your portfolio for $1200 a year… It will take you 8 years and 4 months before your original investment comes back let alone make money. I know someone will say, “but you have an asset with your 10,000 so you never lost it.” I disagree, in 10 years most of the things you remodeled will need updating again and as long as it’s cosmetic it doesn’t cost anymore to remodel 20 year old stuff as it does 10 year old stuff. The other thing to think about is timing, not everything needs replacing at the same time. You don’t need to new carpet as often as new paint or new cabinets as often as new counters, etc. When you know their are repairs coming up time your vacancies so that you can have everything fixed in one month rather then having a big repair every time their is a vacancy.