Rehabbing rentals
It takes a different mindset to rehab a rental property than it does to remodel a flip property for resale. And the difference in landlords’ mentalities is vast.
Take what I saw on a Facebook advertisement recently where a landlord was advertising their freshly-renovated house. This thing was nice. I’m talking HGTV nice. The bathroom had custom tile on the floor and the tub surrounds. There was also a high-end vanity with granite counter tops.
The kitchen had high-end cabinets that matched the bathroom vanity. It had granite countertops, the little white subway tiles as the back splash and tile on the floor.
All the walls had the gray-toned paint that is all the rage right now. The trim was painted a chocolate color, and the floors in the bedroom were either luxury vinyl plank (LVP) flooring or a high-quality laminate, which is a fantastic strategy when planning for a rental.
You see, carpet is nice, and it’s cheap. And as we all know, landlords — me included — tend to get a little, uh, price sensitive when putting money into a rental. But consider something we’ve encountered; no matter how good the tenants were to our property, we were having to replace carpet about every third tenant, which not only increased our turnover budget but also added to the time between one tenant and the next.
Because of that fact, we adopted a different strategy. We started putting solid state flooring throughout our houses. By solid state, I mean a good-quality laminate or LVP. This costs about double what carpet and roll vinyl would on the initial rehab, but it makes for a more durable floor. And after the third tenant, it pays for itself.
I want to go back to the statement I made about landlords being cost sensitive. There’s a reason we’re this way. In the rental business, it takes a long time to make a profit. Let’s consider the house I was looking at on Facebook. It was a two-bedroom one-bath house renting for $650 dollars a month. After paying taxes and insurance and allotting money for vacancy and a mortgage payment, this house will probably yield a positive cashflow of less than $200 a month. But for simplicity, let’s use the $200.
At $200 a month, that’s a total income of $2,400 a year. I’m betting the rehab on the HGTV ready rental with new kitchen cabinets, granite countertops, custom tile and new floors throughout cost at least $24,000 to complete. That means it will take an entire 10 years of consistent tenancy with no repairs or vacancies before this house begins making a profit.
Are you beginning to understand why landlords are a little cost sensitive?
So when rehabbing a rental you really have to begin with the end in mind as far as how you spend. Ask yourself questions like, “Am I planning to keep this house forever? Will I sell it after a few years?”
If you’re planning to sell it after a year or two, you may want to opt for the rehab upgrades to increase your value. But if you’re planning to keep it forever, you need to carefully plan every dollar you put into the house.
We’ve done things like switched to using the same color of flat paint on all our rentals. Because there’s no sheen to worry about, the walls don’t have to be cut in, and we can pay a handyman to paint the entire house in a day. Decisions like this cut down on turnover cost.
At the end of the day, when you rehab a rental, use common sense. Make sure your decisions are based on good financial planning and not just frugality. Being cheap will cost you more in the long run. What you really want is a sound house in great condition that people will love to rent.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.