Damien was only 20 years old when he purchased his first rental property. His idea was simple: he would buy a house, fix it up a little bit, rent it out to pay the mortgage, and return from serving in the military to a free-and-clear home. The idea paid off, and shortly after his homecoming the tenants paid off what was left of the mortgage. Now, years later, what was once a hobby has resulted in an impressive real estate portfolio with a steady cash flow.
While Damien does flip the occasional house, he’s primarily a buy-and-hold investor. He opted to go the rental route because it’s less risky and fits in with his long-term financial goals.
Skipping on flipping
In 2016, as many as 5.7% of all home sales were home flips. Whether inspiration comes from binge-watching HGTV’s Flip or Flop or a lifelong dream of getting into real estate, the appeal is obvious: quick profit.
While the market can certainly be profitable, it’s also very competitive. According to one source, the average gross flipping profits nationwide have decreased for three consecutive quarters. These numbers, in conjunction with rising rents, make residential rental properties an appealing option for real estate investors.
According to a Cozy landlord in Plano, Texas, renting out a home is a lot less risky—especially for first-time property investors.
“Renting is a good long-term strategy and more beneficial from a tax standpoint,” he says. “Your total return can easily be above 20% once you factor in rent, the home’s appreciation, and the tax benefits. It’s relatively low-risk. Flipping requires a lot more expertise and has a narrower margin for error.”
Rental investments could also be risky business if you don’t do your homework. After all, nobody wants to end up stuck with a money pit. If you’ve decided to renovate a property to rent out, here are a few helpful hints to get you started.
Investing in a fixer
The average multi-room home renovation comes in at just under $40,000. However, a renovation can easily be much more expensive. Kitchens and bathrooms can be costly to renovate, especially because of big-ticket items like appliances. (Check out these numbers.)
Damien cautions renovators to stick to a budget and be careful not to over-improve a property.
“You ride a fine line between under- or over-renovating,” he says. “In theory, you want to make it really nice. But if it’s a rental, you have to watch what you’re spending on repairs and renovations in comparison with the max rent you can charge. In real estate, cash flow is king.”
So how can you make a rental appealing without going overboard on renovations?
Budgeting like a boss
First things first—make a budget. Estimating costs on a remodel can be challenging, but careful planning can save you time and money. Determine how much you can afford to invest in renovation costs. Then, assess your property to get an idea of how much work needs to be done.
Remodeling magazine’s 2017 Cost vs. Value report suggests starting with projects that involve replacing something broken, rather than projects with the sole purpose of making something look better.
For example, new granite countertops in the kitchen are beautiful but also costly. Roofing repairs, fixes to structural damage, and improvements to windows are all justifiable renovations. (Hint: Knowing the difference between repairs and improvements is helpful when tax season rolls around and you’re looking for deductions.)
Doing it (mostly) yourself
Once you have your budget set, it’s time to make a list of projects and decide which ones you can handle yourself vs. what you’ll need to hire a contractor for.
There are basic repairs and upgrades that most people are comfortable taking on, such as a putting a fresh coat of paint on the walls and putting down new laminate flooring. These little low-cost fixes go a long way in improving a home. (Pro tip for choosing paint colors: “greige” is where it’s at!)
Don’t forget to make improvements to the exterior of the home as well. While interior renovations are more visually appealing, exterior upgrades actually generate more bang for your buck. “Curb appeal” projects, such as replacement doors, windows and siding, can generate significantly higher returns than work done inside the home.
For bigger projects, such as full kitchen remodels, you’ll probably want to hire someone to help you out.
Hiring someone to help
Even if you’re fairly handy, some jobs are best left to the professionals. That said, it’s not always easy to find the right team to get the job done. According to Donna and Jim, who’ve been in the business for over 15 years, you should assemble the right team early on.
She suggests having a good, reliable carpenter plus a plumber and electrician on standby for emergencies. “Trust me, you don’t want to be scrambling to find a good plumber while water from a leak quickly ruins your ceiling,” Donna says.
Donna recommends going to local meetings for real estate investors. She regularly attends free seminars and gets recommendations from other landlords in the area. Many investors, Donna included, have had luck with real estate coaching organizations like FortuneBuilders. Whichever route you choose, networking is an excellent way to get great recommendations from your peers.
Making tenant-friendly upgrades
Once your rental home is sitting pretty, consider making minor updates, such as replacing light fixtures or upgrading appliances. When you’re shopping for appliances, fixtures, and other items for the interior of the home, look for wholesale options with lower prices.
Choose durable materials that are more likely to hold up, so you can avoid renovations over the years. The longer the lifespan of a remodel, the more profitable you’ll be. Avoid anything too flashy or high-end, such as expensive materials or bonus features like fireplaces and pools. While these items can be nice to have, they probably won’t pay off in the long-term.
Some popular amenities that appeal to renters include:
- A fenced-in yard for pets
- Outdoor spaces
- Extra storage space
- Off-street parking
- Secure bike parking
- In-unit washer/dryer
- Area security (fenced in, well-lit, etc.)
Of course, renovating a rental is only stage one. Whether you renovate to rent or flip an investment property, the right strategy will put you on the path toward achieving long-term financial gains.