Preparing a Renovation Plan
Investors own rental properties for several reasons, but the two common ones are:
- Generate income by making a profit.
- Increase a property’s value during ownership.
Financially, they are the two factors that successful investors use to test ideas and decisions about possible renovations. They work to a plan based on budgets. The budgets are tied to those two factors. By using those factors, it is fairly easy to move to the next step in the decision process:
- What are sensible things in this property to renovate?
- How much should be budgeted for each renovation?
- What is a sensible time frame to begin and complete each renovation?
Preparing a Renovation Budget
Go back to the two prime factors – profitable income and wealth creation. Income comes from the rent a tenant pays. This rent (plus tax deductions for business expenses) fund the renovations. It makes sense, therefore, to look at the renovation work from the point of view of, “How will this improvement generate rental income?” Answer the question like this:
- How much rent will the improved property bring in? You know what other, similar properties in the area are being rented for, and you know how big an impact the renovation is likely to have on market rent.
- How much of the expected rent will go in fixed costs? (Property taxes, HOA fees, etc.)
- How much of the remaining rent will be allocated for other costs? (Possible repairs, etc.)
- How much of the remainder does it make sense to invest in the renovation? This helps to calculate how long it will take to recover the expenditure.
- How attractive will the renovation be in encouraging immediate occupancy? Other investment properties are competing for good tenants. Vacancies are anathema to annual profit, so the quicker a property is rented out to an “ideal” tenant the better.
Renovation decisions are all part of successful property investment. Simply deciding to renovate a bathroom or kitchen or to replace the windows “to make the property look more attractive” can result in annual losses instead of profit on that property. If the likely market rent amount cannot contribute quickly enough to paying for the work, then where is the real value in doing that work?
By beginning with what a renovation will do to annual rental income, and then how it will affect an increase in property value a landlord can make the right decisions about a renovation budget.