SS235: Renovations That Don’t Add Value

SS235: Renovations That Don't Add Value

Many landlords assume that any renovation will boost their property’s value but that’s often a costly mistake. In this Strategy Saturday episode, Charles Carillo breaks down six common rental property upgrades that fail to increase rent, resale value, or ROI. He explains why features like pools, solar panels, luxury appliances, and over-customized layouts can actually hurt your bottom line. With practical examples and years of investing experience, Charles helps real estate investors avoid renovation traps and focus on upgrades that truly impact cash flow and tenant satisfaction.

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Talking Points:

  • Not all renovations will add value to your property or raise rents, and some renovations might actually decrease your property’s value or make it harder to sell or rent altogether. Typically, with rental properties, we are focusing on making renovations that will increase rents and thus increase value. If you were flipping a home to sell to future homeowners, the level of renovation would differ since the buyers will be living there. Compare that with a personal home you are purchasing or already own, your type of renovations will vary as well, since they will be more geared toward your family’s requirements versus a more universal flip renovation.
  • Some Renovations That Will Not Increase Value Include:
    • 1. Unpermitted improvements, mainly structural improvements and improvements requiring a licensed contractor to complete. Inspectors and lenders will most likely not approve unpermitted work.
    • 2. Over-improving properties. Properties that have been overimproved will not achieve any meaningful increase in value or rent if the neighborhood does not support those renovations.
    • 3. Installing a Pool. Adding a pool can be expensive and will not meaningfully increase the value of your home or increase the rents you can achieve. If you are renting a property, it will increase your ongoing maintenance and your insurance premiums.
    • 4. Installing Solar Panels. Solar panels usually take decades to show a return on investment, and at that time, they might require replacement. 
    • 5. High-End Appliances. Similar to over-improving, high-end appliances rarely increase the value of your property and can be costly to repair and maintain if they are installed in a rental property.
    • 6. Manipulating the Layout or Number of Rooms. If you are renting a property, having more bedrooms will usually fetch a higher rent, but the trade-off is that you might now be missing a dining room. In one of my first rental properties, we converted the dining rooms to bedrooms, making 3-bedroom apartments with a living room and a kitchen, and it worked great. If it were a single-family house and the new owners lost 1/3 of their common area space, this might be less appealing. Moving on to investors who rent properties.
  • Here are some apartment renovations that generally do not increase rent or will only increase it minimally. Just because a renovation does not increase rents substantially does not mean I would not perform them, since it might help in renting the unit faster, which will directly increase your net operating income with less unit downtime.
    • 1. Basic Maintenance. You need to perform basic maintenance like: plumbing repairs, electrical updates, fixing broken appliances, pest control, etc., but it will not increase your rents since it is taken for granted by the tenant that the roof will not leak.
    • 2. Efficiency Upgrades. Installing energy-efficient windows and doors can be expensive, and most tenants will not value them anywhere near that cost. Additionally, LED lights and energy-efficient insulation might have a minimal impact on an apartment renter and will most likely not request a higher rent.
    • 3. Common Area Upgrades. Upgrading common areas like hallways, stairs, landscaping, etc., might not directly increase rent that much, but it will assist with renting units faster and will give tenants more pride in their units. 
    • 4. Small Cosmetic Updates. Minor cosmetic upgrades typically do not cost that much and will not substantially increase rent, but usually these updates have a high return on investment. Fresh paint, or accent walls, new blinds, upgraded light switches, faucets, or USB outlets. It is doubtful that adding 2 USB outlets in the kitchen is going to increase rent dramatically. Still, you combine that with an accent wall, new faucets, and new paint in the rooms that require a refresh, and now you have a more substantial rent increase and are probably renting that unit faster as well.
    • If you’re interested in learning more about minor renovations that can increase your rent, check out episode SS219.
  • Your goals for the property will directly impact the level of and type of renovation you will perform. Just because a renovation does not directly increase rents, it might be assisting with tenant retention and the speed at which you rent units. It is always best to check out your competition and what your local market is offering renters and buyers before you decide on your renovation plan.

Transcript:

Charles:
If you own a rental property, you’ve probably asked yourself, should I upgrade this? And I used to think the answer was always yes, but after years of owning and managing rentals, I found something surprising. Not every renovation add to value. In fact, some updates might actually hurt your returns. Welcome to Strategy Saturday. I’m Charles Carillo. Today, in this episode, we’re breaking down renovations that don’t add value, so you can avoid upgrades that look in theory, but don’t increase the bottom line. Over the years, I’ve made upgrade decisions that felt smart but didn’t improve Rent resell or ROI. And I’ve also seen other investors make the same costing mistakes. So let’s break down what worked and what was just wasted money. Not all renovations will add value to your property or raise rents, and some renovations might actually decrease your property’s value or make it harder to sell or rent altogether.

Charles:
Typically, with rental properties, we are focusing on making renovations that will increase rents and thus increase value. If you are flipping a home to sell to future homeowners, the level of novation would differ since the buyers will be living there. Compare that with a personal home that you are purchasing or already own. Your type of renovations will vary as well, since they will be more geared towards your family’s requirement versus a more universal flip renovation. So some renovations that will not increase value include number one on permanent improvements, mainly structural improvements and improvements requiring a licensed contractor to complete inspectors and lenders will most likely not approve un permitted work. Number two is over improving properties. Now, properties that have been over improved will not achieve any meaningful increase in value or rent if the neighborhood does not support those renovations. Number three is installing a pool.

Charles:
Now, adding a pool can be expensive and will not meaningfully increase the value of your home or increase rents you can achieve if you’re renting a property, it will increase your ongoing maintenance and your insurance premiums as well, which kind of takes away from what we’re trying to do, which is increase our NOI. Number four is installing solar panels. Solar panels usually take decades to show return on investment, and at that time they might require replacement, so not a great investment idea. Number five is high-end appliances, and this is similar to over improvement, but high-end appliances rarely increase the value of your property and be costly to repair and maintain if they’re installed in a rental property. And they might need like a specialty repair person to come out and fix ’em, which just decreases your NOI and increases your headaches as they are. Number six is manipulating the layout or number of rooms.

Charles:
Now if you’re renting a property, having more bedrooms will usually fetch a higher rent, but the trade off is that you now might be missing a room, a dining room, right? And one of my first rental properties, we converted the dining room to bedroom and making three bedroom apartments with a living room and a kitchen, and it worked great. If it were a single family house, the new owners lost one third of their commonary space. This might be less appealing, but it was one of the things with rental properties that having that extra third bedroom for people, it allowed us to get a higher rent, and it also made people stay there longer, so it was a win-win. Now moving on to investors who rent properties. Now, here are some apartment renovations that generally do not increase rent or will only increase it minimally. So just because a renovation does not increase rent substantially does not mean I would not perform them since it might help in renting the unit faster, which will directly increase your net operating income with less unit downtime.

Charles:
But you have to make that decision of how much effect it’s gonna have on your property. So number one is basic maintenance. You need to perform basic maintenance like plumbing repairs, electrical updates, fixing broken appliances, pest control, et cetera. But it will not increase your rents since it will be taken for granted by a tenant that the roof will not leak, right? They’re not gonna pay you more because the roof doesn’t leak or that they have hot water. Number two is efficiency upgrades. Now, installing energy efficient windows and doors can be expensive and most tenants will not value them anywhere near the cost. Additionally, LED lights and energy efficient insulation might have a minimal impact on an apartment renter and will most likely not request and not require a higher rent from the tenant. Now, one of the things too is that we’d have, with my first rental properties up north, they’d have your furnaces and then they’d have like all these different grades of high efficiency and they got very expensive and you were like, it just doesn’t make sense.

Charles:
You’re not gonna put high efficiency furnace in there and I’m gonna try to get like an extra 40 bucks a month from it. It’s just not gonna work, right? So it’s one of those things where it just doesn’t pan out. So that’s one of the upgrades you would make. You’re just gonna put in there like the basic furnace that’s gonna work well and be more efficient than the last one that was in there. However, it’s not gonna be the one up here, the top one that’s gonna be two x three x the cost of it. Number three is common area upgrades. Now, upgrading common areas like hallway, stairs, landscaping, et cetera, might not directly increase rent that much, but it will assist with renting units faster and will give tenants more pride in their units. This is also a good thing too with renewals. Number four is small cosmetic updates.

Charles:
Now, minor cosmetic upgrades typically do not cost that much and will not substantially increase rent, but usually these updates have a high return on an investment, fresh paint or accent walls, new blinds, upgraded light switches, faucets, or USB outlets. It is doubtful that adding two USB outlets in the kitchen, that’s going to increase rent dramatically still. You combine that with an accent wall, new faucets and new paint in the rooms that require a a refresh, and now you have a more substantial rent increase and you’re probably renting that unit much faster as well. Now, if you’re interested in learning more about minor renovations, that can increase your rent checkout episode SS 219. That’s SS 219. Now, your goals for the property will directly impact the level and type of renovation you’ll perform. Just because the renovation does not directly increase rents, it might be assisting with tenant retention and a speed at which you rent units, which all go to your bottom line.

Charles:
It is always best to check out your competition and what your local market is offering renters and Myers before you decide on your renovation plan. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndicationsuperstars.com. Look forward to two more episodes next week. See you then.

 

Links Mentioned In The Episode:

  • SS235: Renovations That Don’t Add Value

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