Real estate investors are always looking for a high return on investment (ROI) when buying rental properties. Higher returns can be achieved and influenced in many ways. Real estate renovation is one of those ways.
Different real estate renovation projects offer different benefits. Determining which renovations to undertake for maximum return does depend on the property’s condition, but it also depends on what you plan to do with that property.
Related: What Is a Good Return on Real Estate Investment?
If you’re planning on buying an investment property to flip for a profit at resale, or you’re updating your current investment property to increase its value before putting it on the market, this blog could still benefit you. However, the main target of this blog on real estate renovation is those of you following a buy and hold real estate investment strategy.
Whether you’ve just realized it’s time to spruce up your current rental property, or you’re planning on investing in a fixer-upper to rent out after renovations, knowing how real estate renovation affects ROI is important. Let’s get into it.
Benefits of Real Estate Renovation
The main reason real estate investors choose to take on renovation or remodeling projects is simple: the potential long term return on investment. Renovated rental units justify a higher rental rate. However, there are a couple of other factors behind real estate renovation:
- To maintain or improve the value of the investment property through necessary repairs or replacements
- To increase equity
- Rental property improvements to attract better-qualified tenants
- Tax advantages
- Reduced maintenance
- Lower vacancy rates
Let’s find out why these factors are important to consider and how they affect ROI.
1) Increased Rent
This is the ultimate factor when determining future return on investment. How much more can you increase rents as a result of this real estate renovation and for how long? After all, every business expense has a cost and a benefit. Will these renovation costs make sense financially when looking at the long-term benefits?
It’s very important to think about how long it will take you to actually recover the cost of your renovations through the increased rental rate you can now achieve from your rental property.
2) Increased Value/Equity
Higher rent isn’t the only major effect real estate renovation has on ROI. Think about the increased equity you will have in your rental property after these improvements. For example, if you spent $5,000 on a kitchen renovation, your investment property’s value will increase by that amount or even more. One can even say this increased equity covers the renovation costs. Increased rent or increased value- either way, you’re looking at better cash flow and a better real estate investment.
Related: What You Need to Know About Real Estate Equity
3) High-Quality Tenants
It’s also important to consider your target tenant group before taking on real estate renovation projects for future rental properties. Newly improved rental units tend to attract more serious renters- renters who would appreciate these improvements and not recklessly damage any new installments.
You need to make sure your target tenant will actually be able to pay the higher rental rates. This is especially important when investing in rental properties that are already occupied. You’d need to go over the lease agreements and discuss the change in rental rate after real estate renovation.
Find Out How to Raise Rent Without Losing Tenants.
4) Reduced Maintenance
This one’s pretty obvious. Depending on the condition of the current kitchen and bathroom appliances, maintenance and repairs could really build up a hefty expense. New appliances/upgrades mean fewer visits from maintenance. Real estate renovation could save you hundreds annually for the first couple of years. This is also true for electricity and plumbing; new sinks or toilets could go a long way. Lower annual expenses matched with higher annual rental income is a great booster for ROI.
5) Reduced Vacancy
Most people want to live in new and trendy homes. Putting a renovated rental property on the market won’t just allow you to charge premium rents, it’ll also help it get occupied quicker. The less time your rental property is vacant, the more money you save. An unoccupied rental isn’t doing anything for your returns.
Renovations for Higher Return on Investment
Now it’s important here to not “over-renovate.” Not every renovation will lead to an improved ROI. Real estate investors need to show restraint with the extent of their renovations; it’s not necessary to get the most expensive appliances or flooring for a rental property.
For example, custom-made cabinets or high-end faucets won’t really do anything for your cash on cash return and cap rate (two key measures of ROI). One doesn’t really have any added value to the tenant (unless it’s a luxury rental in which case it might) and the other just isn’t sustainable.
Related: Home Renovation: A Guide for Fixer-Upper Investments
The point is, an extra renovation cost doesn’t necessarily mean it’ll reflect on your ROI. However, this doesn’t mean you should do whatever’s cheapest. It all comes down to durability and the aesthetic your target tenant desires. Here are some cost efficient and desirable renovations which offer substantial ROI for rental properties:
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Deep Cleaning Interior/Exterior
Possibly the easiest and cheapest way to increase the appeal of your rental unit is to actually clean it. Thoroughly cleaning the interior could completely flip the property. The same goes for the exterior; pressure washing the outside grounds will give a fresher feel to the place.
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Paint
Most fixer-uppers come with a dull paint-scheme. A fresh coat of paint of some welcoming colors will definitely help make the rental property look brand new.
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Flooring
The floors in your rental property could give it a completely different feel. With so many different types and styles on the market, the choices are endless. Changing the floors to match the rest of the real estate renovation of your investment property will definitely pay off.
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Kitchen and Bathrooms
Most of your real estate renovation budget will be spent on these two areas in the investment property. Whether you’re renting this property to tenants or putting it up for sale on the market, remodeling the kitchen and bathrooms is key. According to Realtor.com, kitchen and bath remodels offer nearly an 85% ROI. Even small improvements (resurfacing cabinets/tubs and refinishing cabinets) can make a big difference.
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Windows/Doors
Having adequate doors and windows isn’t just important for the overall look of the investment property, but it’s also important for the safety. Jammed windows and creaky doors aren’t what tenants are looking for. Although doors are less expensive than windows, the final cost difference in updating both will be worth it.
Of course, the list of real estate renovation projects investors can take on is endless, but this is a great start for improving ROI.
Need help finding out exactly how valuable your future rental property will be after real estate renovation? Want to know how the costs will directly affect your ROI? Use Mashvisor’s tools (such as our investment property calculator) to conduct a comparative market analysis and investment property analysis to figure it out.
Start out your 14-day free trial with Mashvisor now.