Novice property investors need to pay heed to the axiom that says you should never over-improve a property relative to the neighboring houses on the same street. With this in mind, when investing in investment properties, you’ll avoid turning your investment property into a grandiose vanity fixer-upper project. Remember, you won’t be living in the rental property…it’s a business! As you search for properties to invest in, always look for the most basic fixes and repairs that can keep your overall improvement costs down.
The biggest bang for your buck
Like with home owners, there are some improvement projects that bring investment properties the most bang for the buck down the road. When renovating a rental unit, the following renovations tend to be the most cost effective rehab areas you should work on first. Remember, you’ll always want to keep these renovations to a bare minimum – unless your neighbors have million dollar homes with high end appliances in the kitchen, for example.
Keep in mind the basic rehab areas listed below when trying to flip houses. These are the simplest ways of adding value to any rundown home. And they represent the best renovations for property investments. But always remember, you’ve got to improve to the level of the next door neighbors – and not way above them. This is the safest way to keep your renovation costs in check.
I have written in prior articles here about remodeling investment properties. And certainly kitchen rehabs offer the highest return on your investment dollar. Just make sure not to overdo it! I’ve recommended “sanding and painting the existing cabinets, and then replacing the old appliances…If not, keep your kitchen redo budget in line with like homes’ kitchens. Don’t forget that new track lighting, a new sink and new faucet can really spruce things up inexpensively. Laminate countertops are OK, unless everyone else on the block has granite. Then you must spring for the granite. Avail yourself of planning and design help from local home improvement centers.”
I’ve found that Home Depot and Lowes each have excellent kitchen departments, with experienced kitchen design pros on staff. If you purchase your cabinets from them (and they have a good deal of excellent quality stock to choose from), you can avail yourself of their design services for free. Use them. It’s a very cost-effective way to skirt high design costs, especially if you’re not a kitchen design expert (and who is?). Also keep in mind that some local hardware stores, if large enough, also offer cabinetry and free design service as well…
I have also noted here in the past that you’ll want to keep things as simple as possible. I have pointed out that “if you can just change out existing toilets, sinks and towel bars, you’re lucky. But sometimes old tile walls look terribly dated, and/or you’ve got to spring for a total gut renovation.” I have also said that you should keep material costs down by using big box stores for less expensive building and plumbing materials. When purchasing bathroom vanities and cabinets, the large chain stores offer great looking cabinetry that can look as good as designer cabinets at a fraction of the cost.
Upgrading the plumbing system
I have also written here that “if a house hasn’t had any plumbing upgrades in the past twenty years, you really need to consider changing out all lead pipes to the more recent plastic tube piping of today. While the labor cost is high, the materials cost is low. In addition, any dated plumbing fixture should be upgraded as well – from dishwashers to washing machines, and everything in between.” In so doing, you’ll avoid some major headaches down the road, as older pipers tend to leak and burst quite easily with age.
It’s best to concentrate on interior painting first. Exterior paint jobs tend to be twice as costly, and may not offer the bigger return on your investment dollar. However, if the exterior of your building makes the house look like it should be demolished, then, by all means, spend the bucks to have it done as well. With interior painting, it’s best to stick with off-white, neutral colors. This is because, the more out of the norm the color you choose, the narrower the range of buyers or renters who may like it. I have noted here that you should “also keep in mind that light equals bright. And bright is a flipper’s moneymaker. Remember too, that keeping the whole house the same shade of color keeps an evenness to the potential buyer’s eyes as they move from room to room. This makes for another positive impression on any house you’ll be flipping.”
I have also pointed out before how “carpeting is still the cheapest way to go – but it has no “wow” factor to it. Refinishing old wood floors is a great way to go – if the existing floors are hardwood to begin with. If not, consider using some of the new engineered hardwood flooring available on the market today. Or, one can simply upgrade with the “look” of wood, using laminate hardwood flooring. This is what most buyers today expect. Naturally, if you do go with any carpeting, keep it very neutral colors – beiges or grays, to appeal the largest group of buyers.”
Developing your skill set
As you continue to acquire new properties, and gain more experience in property renovations, you’ll certainly be developing a skill set for streamlining these basic renovations outlined above. You’ll learn where to find the least expensive materials for any given project. I’ve noted before how that “with this facility, and an increased knowledge of what local stores (including big box stores like Lowes and Home Depot) offer the best deals on these materials, you’ll quickly become expert at estimating, then purchasing the most inexpensive, durable and functional materials for your rehabs. Ultimately, your capital spending budget for each investment property will be kept in check, lowering your overall carrying costs, and increasing your monthly cash flow in the process.”
Figuring your ROI of investment property
When determining your best ROI for renovations, you’ll need to divide the annual positive cash flow amount by the expected total amount you’ll be putting into the property when you buy it. This will include your down payment (or, the total amount if you’re paying all cash) plus all closing costs on the purchase. It will also include all your improvement costs you paid out of pocket yourself with cash. By keeping your materials costs for any rehab project down, you’ll obviously be keeping your overall cash infusion by yourself down. Once computed, this ROI is also sometimes referred to as your “cash on cash” return on the investment property. It will enable you to compare buying this particular asset with other types – whether they be another property you’re interested in, or other investment choices like REITs, stocks, bonds, etc. Of course, this simple analysis does not take into account the other benefits of property ownership, like market appreciation, tax benefits that include the ability to depreciate your asset, and the overall barrier against inflation that property usually confers on investors.
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