“Remodel it and they will pay.” I believe this myth has sprung from watching too many television shows showing dramatic makeovers and jaw dropping profits. While a fix-and-flip can earn some quick cash, remodeling rental properties are not always that profitable. We are going to show you why that is the case.
Top 3 Remodeling Projects
When it comes down to it, there are only about three common major remodeling projects that are rental related. Here is a chart showing the top five projects and the average cost for properties in the South Atlantic area of the U.S. If we assume a holding period of 7 years, the chart also shows the monthly rent rate increase just to breakeven after 7 years.
Cost vs. Income
Before you opt to remodel your rental, you need to do some analysis first. Consult with your property manager to find out how much your proposed upgrade will increase your rent. If it will cost you over $13,000 to remodel the kitchen and the remodeling will push your rental into the next category allowing you to charge $200 more per month. You will recoup your investment in about 5 ½ years. The $200 thereafter is pure profit.
Sounds good? But where will you get the $13,000 to begin with? If you need to remortgage, factor that cost into your analysis and do not forget to include the additional interest you will be paying as well. All of a sudden you have to wait longer than the average 7 year holding period to recoup a profit.
On the other hand, if you decide to forego the complete remodel and just update the appliances and resurface the cabinets for say, $6,500 then with a $150 a month rent increase you will see a profit in only a little over 3 ½ years. That is if the market will justify the rental increase. This is why careful research is critical before you begin the project.
The Basis for Rent
First and foremost on a tenant’s mind is going to be the number of bedrooms. If you have a $13,000 kitchen in a one bedroom apartment, a family of four is not going to be interested no matter how nice the kitchen. That is why rent is allocated first based on the number of bedrooms and then it is bumped up due to the condition and amenities. That means that if you upgrade to hardwood floors from carpets, do not expect to see a $300 a month increase in rent. You may be looking at only $50 to $100. If you were to rearrange the interior and could realistically pull a second bedroom out of the rental, then you could see a $300 a month jump immediately.
Just because your rental looks great, is modern and state-of-the-art does not mean that you will be able to charge a proportionately larger amount of rent. Rental renovations require a cost-to-value analysis and careful budgeting to make sure it will earn you more money in the end.