In 2020, property owners across the U.S. reported rent increases of 10% to 30% on renovation expenditures averaging from $2,500 to $8,000. At first blush, the decision of whether or not to renovate a property that’s a bit worn out seems straightforward. But getting a steady return is not guaranteed without a sound strategy.
Getting the most bang for your renovation bucks is more complicated than it might seem at first. Without question, you want to make renovations that improve a property’s value and revenue. The return on investment (or ROI) depends upon a host of factors, including location, a unit’s curb appeal, age, and more.
Before you invest in granite countertops for every kitchen in your multifamily building, you need to know a few important things.
What does the market want?
To make the right renovation decisions, take a cue from Mr. Rogers. Who is in your rental property’s neighborhood?
What motivates renters varies quite a bit by location, and those tastes change with time. People may be willing to pay more for luxury amenities in an up-and-coming neighborhood, while they may be more interested in bargains a few blocks away. Understanding what people are willing to pay for at the local level is crucial.
Location has long been the “holy grail” of real estate. The pandemic has thrown a lot of assumptions about location out the window, as places that previously enjoyed high demand (and higher rents) have struggled to compete with lower-cost areas. We expect that trend to reverse, which only highlights an important market fact: good projections about the future are crucial for making good renovation decisions.
What is the competition doing?
It’s not enough to know what your target residents want. You also need to know what your competition is doing. Otherwise, you risk over-investing in expensive upgrades in a market that won’t support the higher rents that are needed to achieve the goal ROI.
Renovations should be undertaken with a clear goal in mind. Relatively modest upgrades—a fresh coat of paint, minor repairs to common areas—can keep a property on par with its existing competitors. In some circumstances, renovations can “elevate” a property to a higher tier. Accurate planning is essential: aim too high and the ROI won’t be there.
National and local market rates are important guideposts, but be mindful that local trends can differ wildly from nation-wide metrics. For example, one-bedroom units nationally are trending upward in price. But in Los Angeles, we’ve seen a 16% decrease in one-bedroom rental prices year-over-year. In a context of declining overall rents, a renovation strategy that blindly relies on higher rents could lead to a disappointing ROI.
What is your timeline?
You also need to ask yourself how long you intend to hold onto your investment property. Will you have it for a few years or a few decades? Expensive upgrades—like a new roof or new kitchens and bathrooms in every unit—will reduce costs over the long-term thanks to lower maintenance costs, better energy efficiency, and the benefits of tax depreciation, not to mention justifying higher rents. But some long-term returns may only pay off after a decade or more of ownership.
As the ownership timeframe shrinks, the renovation calculation changes. Potential buyers have different aims from potential renters. There’s some overlap, of course, because a property that reliably attracts and retains tenants is more valuable than one that does not. But buyers need to see and understand the value in recent renovations if they are going to pay a premium for them.
Top ways to renovate your rental property
The ROI of any renovation will vary by property, but there are certain upgrades that almost always result in happier residents and, as a consequence, better revenue. These six are some of the best bang-for-buck options in any market:
- Replace old carpeting with new flooring.
- Improve interior lighting.
- Add a fresh coat of paint using contemporary colors.
- Update the bathroom.
- Upgrade kitchen appliances.
- Install a washing machine and dryer, especially in a building that doesn’t have them.
Pan American Properties is your source for renovations
At Pan American Properties, we weren’t satisfied with the results our clients were getting from renovations contractors. So, we built our own renovations business. Today we have licensed contractors on-staff who can handle anything from minor fixes to complete structural overhauls. We pair these capabilities with market and financial insights and a long-term commitment to our clients’ success. Call us today at (888) 754-9700 or email us at [email protected] to learn more.