The desire to over-improve a rental property is probably most common among new investors. It’s just easy to get excited! However, to maximize your profits, you want to avoid over-improving any property.
There are risks when you over-improve rental properties, such as the payback period is longer and your return on investment in the short-term is lower. Another risk is that you can’t refinance your investment. Over-improving also leads to higher maintenance costs for the property. For example, if you put a high-end stove in a low-end rental (or any large margin between the cost of repair and repair warranty), your long-term overhead will be more than the upfront cost.
So, we know why we shouldn’t over-improve, but how can investors avoid this trap?
Before you start your next renovation project, you need to think through what you are working on and what purpose it is serving.
There are, for instance, levels of rehabs with renovation projects.
Tenant rehab is about making the property safe, presentable, and of a certain quality, but the finishes need to be on the value side of the available options.
This means using the same color, the same tile, the same flooring, the same toilet, the same sink, and the same faucet every time (assuming the items are still available). It involves replacing all of the electrical plugs and switches and repairing windows or the roof. Also, make sure that certain items, like cleaning out the main plumbing line and checking/servicing the HVAC, are done before the tenant moves in.
The next is quality rehab. This involves finding deals on quality pieces. Make sure everything is done correctly to code. Make everything inside and out show well.
It’s amazing how much the small things like caulking windows before painting and getting plugs and switches updated make everything look better. Don’t scrimp on little things that could make a big impact on how the property presents itself.
That being said, some properties need more attention. This could be replacing the HVAC or completely updating electrical and plumbing.
Make every detail look clean and updated, inside and out.