SS230: High Return On Investment Renovations

SS230: High Return On Investment Renovations

LLCs provide significant benefits to real estate investors. In this episode, Charles discusses these advantages and why real estate investors should utilize LLCs in their investment strategy.

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Talking Points:

  • The business of rental property investing revolves around boosting the net operating income, which is primarily achieved by increasing rents while minimizing vacancies and unit downtime.
  • We have a primary formula for determining how much to renovate, based on a 36–48-month payback period. In other words, will you be able to recoup your investment within 48 months? Better yet, 36 months. This is key to understanding how much you can invest in a unit.
  • You can use this calculation before buying a property or with a property you already own. Start by checking out the competition in your local area, including properties of similar sizes and vintages, and review the condition of these properties and their asking rents. Compare those findings to the subject property and begin calculating the renovations that can be performed, as well as their impact on your rental rate.
  • I was once asked why we won’t opt for a longer payback timeframe, and the simple answer is that you take on a high amount of risk when renovating units, especially if the level of renovation is not currently present at your property. You aren’t entirely sure if you can truly achieve the rents you are estimating. Additionally, you are taking a unit offline, and every day that it is being renovated, it is not generating any income.
  • Let’s review some high ROI renovations:
    • Starting with some lower price points, these options would include kitchen backsplashes, nicer countertops, removing the plastic bathtub/shower insert, and installing tile from the tub to the ceiling. Another thing we have tested at one property is adding feature walls with a different color and pattern. A feature wall might not result in higher rent by itself, but coupled with other minor renovations, it will help rent the unit faster.
    • Other minor renovations would include replacing the bathroom vanity, which is usually inexpensive, and it transforms the bathroom. Years back, my brother and I would purchase a half dozen vanities at a time when they were on sale and install them as we turned units. Another high ROI upgrade is adding a stackable washer and dryer combo. Typically, the payback period for this upgrade is less than 24 months.
    • If you are interested in learning more about the value of minor renovations, please check out episode SS219.
    • Once you start increasing your budget, ensure that the additional funds are mainly allocated to the kitchen and bathrooms. When we walk through units during the due diligence period, we immediately check the condition of the cabinets, or more importantly, the cabinet boxes. If you can avoid replacing the cabinet boxes and instead focus your money on countertops, new cabinet doors, and hardware, you will dramatically increase your ROI. As your budget increases or if you can keep the current cabinet boxes, you can use some of those saved funds on flooring and lighting.
    • Bedrooms are floors, paint, and a window, but the kitchen and bathrooms are where you can achieve meaningful rent increases.
  • I would always avoid heavy renovations unless you or your partner has extensive experience in renovating properties. My first property was over my head, and I didn’t do another renovation of that magnitude for a few more years. Major renovations are full-time projects to manage, and you need solid relationships with good contractors to complete them.
  • When you’re performing upgrades and renovations, focus on increasing durability and minimizing future maintenance costs and headaches. During renovations, you will often be asked by your contractors how you want to handle unforeseen issues. There is always a cheaper, less thorough method and a more comprehensive approach that will minimize future maintenance. Investing time and money to correct future problems as they are uncovered will yield future dividends in the form of reduced costs and happier tenants.

Transcript:

Charles:
Are you wasting money on renovations that don’t raise your rent? Most landlords spend cash on upgrades that never pay off, but I’ll show you the exact ones that do. Let me walk you through the smart high ROI renovations that make your rentals more profitable. Well, welcome to Strategy Saturday. I’m Charles Carillo. Today we’re discussing high return on investment renovations. I’m gonna lay out some tips for increasing rent, reducing downtime, and making every renovation dollar work harder for you. So let’s get started. The rental property investing business revolves around boosting the net operating income, the NOI, which is primarily achieved by increasing rents while minimizing vacancies and unit downtimes. Now we have a primary formula for determining how much to renovate based on the 36 to 48 month payback period. In other words, can you recoup your investment within 48 months? Better yet, 36 months. And this is key to understanding how much you can invest into a unit.

Charles:
Now, you can use this calculation before buying a property or with a property you already own. Start by checking out the competition in your local area, including properties of similar sizes and vintages, and review the condition of these properties and their asking rents. Now, compare those findings to the subject property and begin calculating the renovations that can be performed and their impact on your rental rate. Now, I was once asked why we won’t opt for a longer payback timeframe. And the answer is simple and it’s that renovating units involve a high amount of risk, especially at the level of renovation is not currently present at your property. You aren’t entirely sure if you can truly achieve the rents that you are estimating. Additionally, you are taking a unit offline and every day that is being renovated, it is not generating any income. Think of going into an apartment complex that has all white or black appliances with laminate countertops and going in and saying, we’re gonna put stainless steel appliances in.

Charles:
We’re gonna put we’re gonna put granite countertops in. And not knowing if that investment you’re putting in there is actually gonna pay back. You might know that the property next door or across the street or down the street, it has those upgrades done and is achieving higher rent. But you’re not a hundred percent sure for your unit it’s different. If you had, you know, five or 10% of your building that already had these upgrades and you are renting ’em pretty quickly. It’s a different story. If you have zero of these renovations done and you’re putting out these thousands of dollars, sometimes tens of thousands of dollars into units and you’re not a hundred percent sure if they’re gonna pay back. So we want to make sure that we’re gonna get high returns on this money that we’re investing into the property. So let’s review some high ROI renovations now, starting with lower price points.

Charles:
I mean, these options would include kitchen, backsplashes, nicer countertops, removing the plastic bathtub, shower insert, and installing tile from the tub, all which the ceiling. Another thing that we’ve tested at 100 property is adding feature walls with a different color and pattern. And a feature wall might not result in higher rent by itself, but coupled with other minority renovations, it will help rent the unit faster, which is the same difference at the end. We want to keep tenants in there longer, we wanna rent the units faster, keep that downtime as short as possible. Now, other minor renovations that you can use would be like replacing the bathroom vanity, which is usually inexpensive and transforms the bathroom. Years back, my brother and I would purchase a half dozen vanities at a time when they were on sale, and we’d install them as we turn units.

Charles:
Another high ROI upgrade is adding a stackable washer and dryer combo. Typically, the payback period for this upgrade is less than 24 months. Now, if you wanna learn more about the value of minor renovations, please check out episode SS 2 1 9. That’s SS 209. So once you start increasing your budget, ensure that your adding funds are mainly allocated to the kitchen and the bathrooms. When we walk through units during the due diligence period, we immediately check the condition of the cabinet, or more importantly, the cabinet boxes and you will dramatically increase your ROI. You can avoid replacing the cabinet boxes. Instead, focus your money on the countertops and new cabinet doors and hardware. Now, as your budget increases, or if you keep the current cabinet boxes, you can use some of those safe funds on flooring and lighting. Now, bedrooms are really floors, paint and a window, but the kitchen bathrooms are where you can achieve meaningful rent increases.

Charles:
Now, I would always avoid heavy renovations unless you or your partner has extensive experience renovating properties. My first property was over my head. I didn’t do another renovation of that magnitude for a few more years. And major renovations are full-time projects to manage, and you need solid relationships with good contractors to complete them. You wanna make sure that they’re not gonna, you know, walk off with your money and your deposit, but also that they’re showing up every day because you have to minimize that downtime of those units. So when you put money in, you’re getting it back as fast as possible. And when you’re performing upgrades and renovations, focus on increasing the durability and minimizing future maintenance costs and headaches. And during renovations. Anybody that’s ever gone through one, your contractor often asks you what you wanna do to handle unforeseen issues that they didn’t know were there. Right? And there’s always a cheaper, less thorough method and a more comprehensive approach that will minimize future maintenance. Investing time and money to correct future problems as they are uncovered will yield future dividends in the form of reduced costs and happier tenants. So I hope you enjoyed. Please remember to rate you subscribe, submit comments and potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs@syndicationsuperstars.com. That is a syndication superstars.com. Look forward to two more episodes next week. See you then.

Links Mentioned In The Episode:

  • SS219: Transforming Properties: The Untold Value of Minor Renovations

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