Rental property renovations are an endeavor that offer immense potential for rental property owners and investors alike. By breathing new life into outdated or worn-down spaces, landlords can attract high quality tenants, command higher rental income, and ensure the longevity of their investment. However, undertaking a renovation project for a rental property requires careful consideration and strategic planning. Let's take a look at the numerous benefits and essential considerations associated with rental property renovations.
Advantages of Rental Renovations
Although rental renovations can be time consuming and cost a lot of money, there are some significant benefits to consider:
Charge More Rent
A rental renovation allows landlords to justify higher rent prices. Upgraded features, modern aesthetics, and improved functionality can attract higher quality tenants who are willing to pay a premium for an updated living space.
When deciding whether or not to renovate your rental property, iIt is important to run the math of the potential increase in rent versus the budget of your renovations. YetiInvesting shares an experience of spending over $100k in renovations, yet increasing rent by over $1,100k per month, enabling them to recoup their renovation costs in under 7 years.
Keep in mind, this is an extreme example and not all renovations will be this big. Even with some minor renovations, you could easily get a significant rent increase. That's why it is crucial to run the numbers for each individual scenario. Another bonus is the potential higher rents, could draw in a higher caliber of renters.
Reduce Costs of Ongoing Maintenance
Regular repairs of appliances, plumbing, or electrical could ultimately be more expensive than upgrading them. When deciding whether to repair or replace, HouseLogic says to use the 50% rule, which states: "If an appliance is more than 50% through its lifespan and if the cost of one repair is more than 50% of the cost of buying new, you should repair rather than replace."
As a rule of thumb, Real Estate Gladiators has solid timelines on the lifespan of appliances and house parts in a rental property:
- HVAC System: 20 years
- Kitchen Appliances: 10-15 years
- Carpet: 5-7 Years
- Hardwood flooring: 10 years
- Paint: 3 Years
Tax Deductions Sweeten the Deal
Landlords can take advantage of Section 179 and bonus depreciation tax codes when undergoing renovations. Section 179 enables landlords to deduct the full purchase price of long-term personal property purchased during the tax year, such as kitchen appliances, carpets, drapes, blinds, etc. Bonus depreciation allows buy and hold investors to receive immediate tax deductions on long-term assets.
Decrease Tenant Turnover
Transunion found that the average landlord spends $1750 per month on a vacant apartment during tenant turnover. The good news is certain amenities can help you keep those properties occupied. Here is some data Transunion found on the top amenities to reduce tenant turnover;
- High speed internet- 94%
- Walk-in closet- 89%
- Soundproofed walls- 88%
- Patio or balcony- 87%
- Washer/dryer in house- 87%
Increase Property Value
Depending on the project, you can see a significant ROI and value increase. Here are the renovations with the highest ROI in 2023, according to Remodeling:
- HVAC Conversion: 103.5% ROI
- Garage Door Replacement: 102.7% ROI
- Manufactured Stone Veneer: 102.3% ROI
Interestingly, Remodeling found that upscale renovations such as a bathroom or kitchen remodel will not pay for themselves upon the sale of the rental property. They can, however, be worthwhile in some of the other ways.
Get more money out of a rental property cash-out refinance.
If you use cash-out refinancing as a tool to grow your rental portfolio, consider improving the property, increasing the value, and getting more cash-out. Learn more about this strategy in our blog post, "Grow Your Rental Portfolio with a Cash-Out Refinance."
Considerations for Rental Property Renovations
If you've weighted the pros and decided to move forward with a rental renovation, here are some additional considerations.
Budget and Cost
Before embarking on a rental renovation project, it is crucial to create a detailed budget and conduct a cost analysis. Determine the scope of the renovation, consider the cost of materials, labor expenses, and potential hidden expenses that may arise. It is essential to strike a balance between the desired upgrades and the potential return on investment.
Disrupting Existing Tenants and Legal Obligations
Renovations often require temporary relocation of tenants or cause disruptions in their daily lives. It is vital to communicate clearly and transparently with tenants about the renovation plans and timeline. Additionally, landlords must adhere to local laws and regulations regarding tenant rights and provide proper notice and compensation, if necessary. Apartments.com has a great guide to state laws.
Long-Term Durability and Maintenance
When renovating a rental property, focus on durable and low-maintenance materials to minimize future upkeep costs. Opt for materials that are resistant to wear and tear, easy to clean, and require minimal repairs. Strike a balance between aesthetics and practicality to ensure the longevity of the renovations.
Return on Investment (ROI) Analysis:
Analyzing the potential return on investment is essential to determine whether a renovation project is financially viable. Calculate the expected increase in rental income against the renovation costs to assess the project's profitability. Consider the local rental market, demand, and rental trends to make informed decisions about which renovations will provide the best return on investment.
Renovating rental properties offers numerous benefits for property owners, including increased rental income, attracting quality tenants, reduced vacancy rates, and increased property value. However, it is essential to approach renovations with careful consideration and strategic planning.