What To Look For On Your Next Rental Property: Adding Value, Do’s and Dont’s, And Figuring Out What Works

You’re now just beginning. You have some idea about what you want, but you don’t have much experience browsing the listings for the perfect property. Whether it’s the property you want to call your forever home, or if it’s another rental property (or your first), the rules you will find in this article will be applicable to both.

At the time of this writing, investors are devouring deals in this market. Yes, it is a seller’s market. This means good deals are few and in between, and when you do happen to come across them, best of luck because they won’t last more than a few days on the market, and if you manage to find one that lasts, expect it to have multiple offers by the time you get there.

There are specific details that you should look out for when finding rental properties. More specifically, you should be looking to add as much value as possible during the renovation stage. Not all renovations will add the same value. A home that is not a good fit will make it difficult to add value.

Before I begin, you should consider speaking to your property appraiser before you begin renovations. Ask your property appraiser what they thought would add the most value to the home that they have just appraised for you. Once they give you their advice, you will take the list of renovations to a contractor and get straight to work.

Here’s what I look for when I look for houses to purchase as rental properties:

1. Unused Space—Yes, generally speaking, the higher the square footage, the better (all else equal). Some homes will have high square footage yet have only 1 bathroom, or just 2 bedrooms. This is not generally bad, however, if a home has the square footage, without altering the structure of the home, and there is ample opportunity to add a bedroom or a bath, you should be considering it before you purchase the house.
2. Adding a room—Carve out the bonus room, enclose the back patio, and convert the garage. Adding a bedroom will increase the value of your home. From an appraisal perspective, a 3-bedroom home is comparable to other 3-bedroom homes. However, once you add an extra bedroom, your home has suddenly gone up a tier. It is no longer comparable to other 3-bedroom homes, but rather 4-bedroom homes, leveling up the appraisal tier that the home is in and increasing the value of the by more than the amount of money you paid to have had the work done in the first place.
3. Adding a bathroom—Much easier said than done. And this is expensive. Easiest if the home has a crawlspace. Much, much more difficult and expensive if the home sits on a concrete slab. In one of our rentals, we had to carve the concrete out into the backyard to get to the main sewer line in order to install a 3-inch pipe for a new toilet. We converted the old laundry room into a bathroom by utilizing the existing plumbing. Homes with crawlspaces make adding a bathroom easier. 
4. Garage—Consider converting the garage into a bedroom. If you were to rent each room individually, this can amount to upwards of $10,000 a year in income, instead of just having a space where your tenants store items that will just collect dust.
5. Old kitchens—The old adage is true, bathrooms and kitchens add the most value to a home. It is wise to spend more money on these two items than it is to spend on flooring and paint. Spend more money in the smaller areas, and consider more expensive tile, fixtures, vanities, cabinets, and so on, to get the most bang for your buck. Shop flooring and paint at a discount. These items cover more square footage and aren’t as widely viewed favorably by appraisers. Consider changing laminate countertops into granite ones.
6. Old bathrooms—Replace the vanity and fixtures. Put in a new high-efficiency toilet (the best $100 you will ever spend). Reglaze the shower. Then paint it a nice neutral color, and you’ve already added thousands of dollars to your home’s value.
7. Other miscellaneous items—Flooring, paint, baseboards, fixtures, and lighting. This is where presentation is key. Most people will judge your home based on how it looks. Choose neutral colors (again). Don’t go too over the top with items; remember that this is a rental property, not your dream home. It just needs to be livable, not extravagant. Put in energy-efficient LED bulbs. Install brushed nickel fixtures.

When looking for homes, pick homes that fit this description. This way, you can get a discount on the home, and then implement the renovations and immediately add value.

Look for homes that are 3/2 (three bedrooms, two bathrooms) with a laundry room or a bonus room/garage that you can convert into an extra bedroom or a bathroom. Look for homes with outdated kitchens and bathrooms.

Immediately after your property has been appraised, contact the appraiser soon before they completely forget that they even appraised your home, and have a discussion with them about what you can do to add the most value to the home. Many of them are more than happy to help you.

On my first rental property, the appraiser told me that the garage that had been converted into a bedroom didn’t count towards the final appraisal because the ceiling was a drop ceiling, and the flooring was peel and stick vinyl, putting it at odds with the rest of the home. Aesthetically, she recommended that each room look similar. In my case, one room had carpet, another had laminate, another had tile, and so on. Each room was a different color. Each part of the house had different-sized baseboards.

I made sure that the flooring was the same throughout the entire house, painted the walls a silvery-gray color, made the baseboards the same size, removed the drop ceiling and put up drywall. I also painted the doors a pristine white and put high-efficiency lightbulbs in all the fixtures.

Basically, I found a home that needed work aesthetically and then spoke to the appraiser about what I could do to the home to increase the value. I did this because I knew that somewhere down the line I would refinance the home to pull out enough cash to be able to invest in another property.

I found a contractor who gave me a fair price for all the renovations. Afterward, I moved tenants in and refinanced the home, pulling $70,000 out of the home.

A home doesn’t need to look perfect in order for you to consider it. Rather, the opposite is true. Adding value to a home is much easier when it has not been updated in decades, providing you with the opportunity to add as much value to the home as possible.