If ever there was a time to improve real property, NOW would be the time! Whether for your own home, and for particularly for rental properties, owners who proactively upgrade their properties stand to win big time — both long and short term. Here’s why.
Return on Investment
The biggest reason to invest in your real property is because there are few better places to put your money. Here is a quick example. One of our clients invested $8,000 fixing up his 800 sf condominium. That is a $10/sf investment! Pretty hefty.
We are leasing the unit up for $200/mo. more. For those of you doing the math at home, that works out to $2,400/year, or a 30% ROI. Year after year after year. That does not include any return from the long term increase in asset value. Just cash on cash.
Now you are saying “But that doesn’t take into account our 8% management fee, or any increase that might have occurred anyhow without the remodel.” And you would be correct. So let’s take out the $16/mo. lost in management fees (8% of $200/mo.) That works out to a whopping $192/year lost. This particlar tenant had his rent raised just a year ago. It is unlikely the unit was below market. But let’s say we throw another $50/mo. ($600/year) into the equation.
The owner’s net extra income is now $2,400 – $192 – $600 = $1,608. Now we are at a more modest 20% ROI! Excuse me? Did I just say 20%! The only things returning that kind of ROI year after year are penny stocks with a whole lot of risk. Real estate is much lower risk, and much more a sure thing.
Shorter vacancy time
Having a unit updated and looking its very best insures short vacancy times, thereby increasing cash flow and ROI. Instead of a 3-4 vacancy time to find the right tenant at a lower price, we are able to find the right tenant at a higher price in 1-2 weeks. Win-win-win all the way around!
Typically people looking for better maintained properties tend to be better tenants. They demand more in their living, and so they take care of thing better. This is a generalization, and there are always exceptions. Rental management is about playing the percentages, and the probability is that someone paying a lot of money for a place will usually take care of the place. That translates into less expense at turnover, which further fuels the ROI.
Flippers are scouring the market looking for beaten down properties they can fix up and flip. You can save yourself the cost and hassle of that scouring — you already own the property. All you need to do is fix it up! We are regularly seeing ROIs from upgrades on the order of 15-30% first year! You need to be strategic about the upgrades. When done right, it is the most worthwhile investment we have seen in a long time!
A note on flipping property: In my humble opinion, it is a great way to make some money, and help realtors get rich. If you want to get wealthy, hold, hold, hold! More on that another time.
About the author
Peter Nelson bought his first home in 1985. It had a mother-in-law around the corner, and Peter was instantly a landlord. That was 36 years ago. Since then Peter has built up a personal portfolio of several homes and apartments, and has helped hundreds of other rental property owners succeed with their goals through sound advice. For more information about the method to his madness in managing rental property, check out some of his videos at https://www.fullservicepm.com/owner-learning-center/.