Thom Holland here.
I recently went through the process of renovating a rental property that I own and learned a good bit. As the experience caught me a bit off guard, I thought it may be a good idea to do a bit of a retro on it and capture a guide of sorts for the next renovation.
Hope this helps those of you who are considering renovating a rental property.
Here we go.
What’s the goal of renovating a rental?
As with any other investment, when renovating a rental, the goal is obviously to make as much money from that investment as possible.
As shown in the image above, you can identify the return on investment by looking at your profit divided by the investment; over the time frame you intend to hold the rental property.
Keep in mind that to increase your profits, you need to increase revenue, decrease on-going expense, or both.
If you’ve been following us for a while now, you’ll know that, when it comes to owning rental properties, we’re all about the long term.
One of the primary reasons for this is that, in most scenarios, the ROI of renovating a rental property just won’t make a lot of sense in the short term. In most scenarios, you can recoup your investment in a couple years and really start to see the returns in following years.
If you’re unsure of what time frame to use, use 10 years.
If you want fast money, stop reading now 🙂
Assessing the Current State of Your Rental Property
Alright, so one of the first things you need to do is take an honest inventory of the state of your rental property.
As we’ve mentioned in the past, our Company does this through our “Property Improvement Plans” for new properties. However, you can easily do this yourself as well.
To do this, you’ll want to create a spreadsheet similar to the one above.
In column A, list out every single component of your rental property.
In column B, create a drop down list with the following options:
- Rent Ready
- Needs Partial Repair
- Needs Complete Replacement
Once you have your spreadsheet laid out, go through each of the components and honestly select one of the options from your drop down list.
Pro Tip: If you find yourself needing to do a lot of property inspections, consider using a tool like Happy Inspector.
Will this rental renovation allow you to raise the rent?
Now that you have a solid understanding of the current state of your rental property, you need to identify which improvements will allow you to raise the rent; after all, you are renovating to rent.
There are a number of ways you can go about this. Here are a few for context:
- Ask neighbors – If you have the ability to do it, the best way to get solid rent data is to just ask. Let them know that you are renovating to rent and are trying to get an idea of how much you can raise the rent. In most cases, they’ll be happy to give you their opinion.
- Zillow – Another option is to use a site like Zillow. As you probably know, Zillow allows property owners to list their rentals on Zillow. When this happens, you can see how much they are listing for.
- Rentometer – Similarly, sites like rentometer allow you to punch in certain data and receive back an estimate for what the rent could be.
Regardless of how you go about this, the point is that you need to identify similar properties and see what they are currently renting for.
If there are differences between those properties and yours, what are they?
Is the kitchen nicer? Does it have new appliances? Does it have a certain type of flooring?
Make yourself a list of each property, the amount it rents for, and the property features it includes.
From there, you can get a rough idea of which property features may allow you to raise rents on your newly renovated property and by how much.
“Cosmetics” vs “The Bones”
It’s important to note, there are some improvements that you may need to make that won’t allow you to raise the rents. However, if these items aren’t in acceptable shape, you risk the property not renting at all.
These are what we like to describe as “the bones”.
These are things that are expected by tenants and need to be considered a capex type expense.
In other words, you need to figure out the monthly cost associated to that particular item, and set it aside when you collect rent each month. At some point, you will need to replace that item and need to have money set aside to do so.
Here are a few examples:
Alternatively, “Cosmetic” type improvements will typically allow you to raise the rents as they are the components that tenants will interact with and experience.
Here are a few examples:
- Renovating a kitchen.
- Renovating a bathroom.
- Adding a deck.
- Improving the landscaping.
- Upgrading the flooring.
- Improving the color scheme.
Tips for Cosmetic Improvements
When renovating a rental, it’s important to keep your original goal in mind.
Remember, this is an investment. Try not to be so emotionally tied to it.
With that in mind, here are a some quick tips related to cosmetic improvements:
- Tenant proof when possible – Let’s face it, tenants are not going to treat your home the same way you would. They will push the definition of “normal wear and tear”. When renovating a rental property, you should always ask yourself “is there a cost-effective tenant proof option?”. You really want to minimize the future property management related work where possible.
- Implement components that can be modified for trends when possible – Trends change. Ideally, you’d like to NOT have to rip everything out when that happens. When possible, try to find and implement components that can stand the test of time with little effort.
- Color scheme – Don’t be trendy here. Stick with something that can hold up against tenants and will last a few years before needing some work. For example, light beige type colors can be nice and tend to hide dirt a bit better. If you must be trendy, consider a simple accent wall.
- Don’t skimp on flooring – Any way you slice it, the saying “you get what you pay for” is true for flooring.
- Living room, hallway, bathroom, kitchen – In most cases, you’ll want to install a waterproof luxury vinyl type flooring with a lifetime warranty.
- Bedrooms – Carpet or luxury vinyl.
- Appliances – stainless steel.
- Fixtures – Fixtures don’t necessarily need to be super expensive to be considered nice. The obvious thing here is to pick a color scheme that matches your rental and keep it consistent. Find a style that will stand the test of time.
- Work towards low maintenance landscaping that provides some color – The best thing to do here is to work with a local landscaping professional. They’ll help you identify native plants that fit properly in your yard. Similarly, there are native plants that can provide a splash of color depending on the time of year.
Planning Your Rental Renovations
So by this point, you should know the following:
- The current state of your rental property.
- How much you could potentially raise the rent.
- Which non-cosmetic items you HAVE to do.
- Which cosmetic items you could potentially do.
From here, we need to start working towards a project plan of sorts.
In your project management software of choice, start by laying out the tasks you need to get done. Keep in mind that what you decide to do will obviously change between projects. However, the process should remain the same.
Once you’ve identified all of the tasks you’d like to get done as part of your renovation, it’s time to start digging in to each one. The best way to do this is to start calling specialized contractors in your area to talk through the tasks they’d be tackling for you.
Generally speaking, you’re trying to answer the following questions about each task:
- How much would it cost?
- Does this task need to be broken down into sub-tasks? If so, is there a certain order in which those sub-tasks need to go?
- Given the other project tasks that need to get done, at what point would this one need to get done?
- How long would it take?
- When would you be able to start?
Once you’ve gone through and collected this information for each task in your project, it’s time to add in the information and build out your timeline.
Similarly, you’ll want to total up all the estimate and figure out if it aligns with a budget you’re okay with. If not, start trying to figure out which items you can live without.
Again, keep your original goal in mind of making as much money from your investment as possible.
Working with Contractors
This really should be an entire episode in and of itself, so we won’t go to deep here.
However, there are a few important things to keep in mind when working with contractors:
- Have a deep bench – The time to do your research on contractors is way before you actually need them. If you plan to do rental renovations, it’s worth your time to create yourself a database of sorts.
- Vet them ahead of time – Ask people who have worked with them before what they think. Make sure they provide you with proof of insurance. Are they organized?
- Always have a CLEAR contract for larger jobs – You need to thoroughly understand what the contractor is going to do, how he is going to do it and how much it will cost. If you feel like things are blurry, stop and dig in. The contract should state how pricing will work and what happens if they go over.
- Provide incentive – Contractors need to eat like the rest of us. However, if you pay them before the job is done, they’ll have less motivation to finish. Make sure that you layout a payment plan that motivates timely and quality work.
- Require digital invoices – You need a paper trail and you want things done right. Ask the contractors to email you invoices. This will help keep things professional and let the contractor know you are set on doing this the right way.
- Verify work before paying – This might be the biggest tip we can provide; it is ultimately on you to figure out if things were done right. That might mean you need to roll up your sleeves a bit and get dirty. However, once you pay a contractor, they are on to the next job. So make sure things are as they should be before you pay them.
- The Home Depot Trick – One interesting tip I read no the bigger pockets forum is the “Home Depot trick”. Go to Home Depot at 6 AM and talk to the contractors there getting their supplies. Given that these contractors are there that early, they are likely quality professionals.
Self Work vs Contractors
Here are a few suggestions to keep in mind if you are considering doing some (or all?) of the work yourself:
- Lean towards using contractors – Remember, your goal here is to make as much from this investment as possible. You can have multiple contractors working at once; there is only one of you. In other words, if you use contractors and stick to the project management, it will drastically speed up your timeline. This means you’ll be able to start generating rent faster than you would if you did it yourself.
- Always use contractors for structural work – Unless you literally do it for a living, do not try to do structural work. It’s dangerous and will end up costing you a lot more money in the end.
- Demo tends to be easy. Building it back is more difficult. – If you must do something, do the demo work. Get a big dumpster delivered to your rental property and go at it. This will actually help you become familiar with the details and issues of the property.
Executing Your Plan
So once you’ve kicked off your plan, it is now your job to MANAGE the project.
You need to literally consider yourself the project manager and the owner of the project. Nobody else is going to own it like you; so take charge of it and lead.
Here are a few ways you can manage rental renovations like a professional project manager:
- Recurring status calls – If you have tasks that are closely dependent upon the progress of other tasks, it’s perfectly fine to set up a recurring bridge and ask your contractors to join it each week. If you can’t arrange that, you personally need to call each of them weekly to get an update on their items. It’s important to communicate to the other contractors things that will impact their portion of the job.
- Keep an open items list – As you go, you will find that random things will pop up. When that happens, immediately write them down in an open items list that you can manage. By the end of your project, you’ll want to have marked off all of the items on this list to some degree.
- Manage risks and the unexpected – When renovating a rental property, you should just expect a curve ball or two. When this stuff pops up, you need to evaluate the situation and figure out the best coarse of action. You have a project team for this; lean on them to help you figure it out. Just remember, you are leading the charge and need to ultimately make the decision; just consult your team first.
- Manage to your plan and communicate regularly – You made a plan before starting based on your team’s estimates. Each week, you should evaluate their updates against the plan. If things are slipping, you need to address it and work with your team to correct it. If you really want to be on top of things, make yourself a weekly report template and send it out to your team each week to let them know critical information as it relates to the plan.
At the end of the day, a great rental renovation, like any other project, is about great project management and the right involvement from subject matter experts.
That’s really it. I struggled on my renovation simply because I wasn’t well prepared to do it. I just jumped straight into fixing problems and never really planned it out until about half way through the renovation.
If you try to wing it, you will struggle.
If you are well prepared, have a plan and are surrounded by knowledgeable contractors, you will succeed.