One of the biggest mistakes I have made investing in real estate is that I have found myself too carried away with renovations.
I purchased a single-family, 4-bedroom, 2-bathroom home in St. Petersburg, FL last year. The home was in decent shape structurally, despite having an outdated kitchen and peel-and-stick vinyl flooring that had been improperly installed.
At the time, I was focused on adding square footage to the house and providing a larger living space for my tenants. There was an unfinished garage that was attached to the home that I felt could be of great use as the master bedroom, seeing as the other rooms of the house were relatively small in size compared to the size of the garage.
I’d also decided that I could add value to the home by building an entirely new bathroom. I would later spend the next two months remodeling the kitchen, stripping the old flooring and installing new vinyl planks, demolishing walls to create an open floor plan, as well as turning the garage into a livable space and adding an entirely new bathroom.
What I learned about remodeling during my time as an investor is that costs can easily get out of hand, especially when remodeling an old home.
This particular home was built in the 1950s and had not undergone any major renovations in the 30 years that the previous homeowner lived there. Once we began to open up walls, we began to find a lot of issues that needed our immediate attention. We found mold, exposed live wires, structural damage, as well as infestations that the home inspectors had missed.
I didn’t need to add an entirely new bedroom to a home that already had four of them, and I didn’t need to add a bathroom when there were already two functioning bathrooms already in place.
Although there is definitely some forced appreciation that comes with adding bedrooms and bathrooms to a home, it usually always depends on the comparable properties in the area. If the other homes in the area have more bathrooms than your property does, then you can be relatively certain that adding another bedroom or bathroom will increase the value of the property significantly.
You can also be certain that adding a bedroom or a bathroom will increase the amount of rent that you are able to charge, up to a point.
Now, I prefer to renovate only what I feel is necessary to provide a higher quality of life for my tenants.
The most important areas are kitchens and bathrooms, and there is no need to spend large amounts of money on lavish materials, so long as the finished space is substantially cleaner and nicer than the space before the renovations had begun.
Make the home livable, and you’ve got a good rental. Make sure all the outlets and all the light switches work. Adding new bathroom fixtures and toilets is a good gesture and will be greatly appreciated by your tenants. A new coat of paint, new flooring (especially when replacing old carpet) with a similar theme all throughout the home, and new light fixtures all go a long way and can be done for relatively cheap.
There is no need to build an entirely new area of the home. Generally speaking, you don’t need to convert the garage if the home is already decently sized. There is little to be gained in the form of appreciation unless the home is devoid of good living space, and your conversions are changing the layout of the home altogether.
Your concern should be to fix the problems of the home that will make the home a pleasant place to live for your tenants, while at the same time preventing problems for you down the road for as long as you choose to hold on to your property. Any other renovations to the home should not be seen as a necessity. Unless, of course, you are marketing the property as a luxury rental.
And another thing: expensive items do not necessarily translate to higher rents or higher appreciation.
Most tenants will not know that you spent $0.89 cents a square foot for new vinyl planks or $4.49 for the most expensive option. All they really know (or will care about) is that the floors are in good shape, look decent, and that for as long as they live there they will not have any issues with them.
The same is true for bathroom tiles. While it makes sense to spend a little bit more for the kitchen and bathrooms, as these are the two areas that appraisers favor most when deciding your property’s value, it doesn’t mean that you should spend top dollar on materials that the tenant will likely not care about, and even worse, damage over the long-term.
What ended up happening with my last rental was that I spent $25,000 more than I needed to, building an entirely new bathroom and converting the garage into a living space.
Maybe it’ll pay off in the long run, maybe it won’t. What I do know is that the extra $25,000 I could have had in my pocket today could have been a down payment for another rental property!
