If you're undertaking a real estate project, it's easy to get carried away with a vision of what the property might look like. Your distressed asset is a blank canvas and your guiding hand is going to turn it into something beautiful. But not all renovation projects are created equal and a dollar invested is not guaranteed to pay you back on the sale of your property.
Some projects, like a kitchen or bathroom renovation, are almost guaranteed to be sound investments. Tasteful, well-budgeted updates in these areas improve the attractiveness of your property and typically generate a positive ROI. This is not the case for many other types of projects. This article will help you avoid the pitfalls of expensive and timely renovations that don't deliver the return that you should expect as a real estate investor.
Skip Out on the Fun Stuff
It's easy to fall into the trap of adding creative renovations to your property. Beginner investors envision how much fun they might have with the addition and project that same value on the entire market. A classic example of this is the addition of a swimming pool. No matter how much you might enjoy summers by the pool with your family, it's unlikely that the investment in the project (and the ongoing costs) will provide the long-term value necessary to validate its addition.
Installation of pools, especially in today's market where labor and materials are difficult to come by, can be exorbitantly expensive. The average project in 2022 cost north of $45,000 with almost $4,000 in annual ongoing maintenance. According to studies, the most that a pool will improve the retail value of your home is 7% and that is only in the most selective markets. It's also important to note that your pool (no pun intended) of potential buyers will be cut in half from the start as many people view them as a deal-breaker. Unless your property matches most of the following criteria, its unlikely that you'll see much of a return from installing one:
- You live in a warm climate where year-round access is possible
- The pool doesn't detract from the rest of the yard
- Pools are the norm in the neighborhood
- You are targeting a very select buyer-pool
This same logic goes for any number of 'fun' additions ranging from pools, hot tubs, saunas, sports courts, playgrounds, and more. Unless you can specifically define why those projects will net you more profit, you're likely better off spending your time and money elsewhere.
Don't half-ass the high-end upgrades
Many house flippers elect to use mid-tier appliances and fixtures in their investment properties. This is an excellent way to manage costs while still making quality improvements to a home. But contrary to popular belief, it's also okay to invest in slightly more high-end upgrades. Though you likely won't see quite the same ROI on these purchases, they can make a property more attractive and bring in buyers of a different quality.
The mistake that beginner investors often make is to purchase high-end materials selectively. If you only furnish half of your property with quality items, the first thing that buyers are going to notice are the pieces that aren't high-end. Going halfway can have the opposite effect as intended and make your renovation look cheap. The money spent on the high-end furnishings won't generate any ROI at all and is unlikely to attract buyers interested in the improvements. You would have been better off paying for the mid-tier items across the board.
While we don't advocate for going for the cheapest materials either (this has its own set of problems) it's important to be consistent throughout your property.
Avoid being the most expensive house on the block
They say that 40% of home buyers look at the neighborhood as the first step in their purchasing process. This means that they've pre-defined the kind of community where they want to live and have likely set pricing expectations to match. If you purchase an investment home in a squarely middle-class community and turn it into the nicest house on the block, you are immediately pricing out the majority of people who might be interested in living there.
The inverse of this is also true. The people who might be able to afford it on the merits of the property alone may not be willing to pay that price in a less-desirable neighborhood.
A nice home will always attract buyers, but you will be short-changing your return on investment. This is particularly true in the current housing market. Do you really need to renovate a house to the point where it’s the nicest on the block when every property is getting 20% over asking price?
Invest in the visible
There are a lot of things that go into a home that go unseen on a 15-minute walkthrough. Think of all the infrastructure that makes sure a home operates smoothly including plumbing, gas, electric, HVAC, and any number of structural considerations. When a buyer is looking for somewhere to call home, they will expect that all of these things are in safe, working order. What they do not expect, is that each of these things is 100% brand new.
Avoid spending costly renovation dollars on projects that are good enough as is. A brand new $3500 air conditioning unit will not pay back the investment if the existing one is already working.
Invest in returning the home to a livable condition and then put money into cost-effective repairs that people can see. This will maximize your investment and ensure that you aren't putting time and effort into projects that buyers won't value the same as you.
Give the next owner room to make it their own
Everybody has their own tastes and preferences. Even the most popular design trends of the day only have 70% approval. So why would you pour money into design and furnishing that won't be universally liked? Updating your investment property from a design perspective means giving your future buyer a blank slate with which to work. Skip the accent wall with the ornate wallpaper. Go with hardwood or laminate flooring instead of wall-to-wall carpet or tilework.
Even if you are not saving money on the renovation itself, you should still aim for a moderate style. Your goal should be to make the home as broadly appealing as possible.
An Important Caveat:
There are always exceptions to the rule and situations where your renovation broke the rules listed above and was still profitable. Maybe the swimming pool you put in is a great differentiating asset as a short-term rental property. It's possible that the high-end range you installed in your kitchen caught the eye of a buyer. These are guidelines, not hard and fast rules. You should always be on the lookout for opportunities to differentiate, but be sure that you have a specific plan for how you're going to get your money back out of whatever renovation you make.
If you are flipping real estate as an investment rather than just a hobby, you should be trying to maximize every dollar that you put into your property. As you're creating your investment strategy and drafting your scope of work, build in a prediction of your expected return on that repair item. It will give you a good way to prioritize your fixes and can even help you spot ways to reduce your budget. Sound planning and the tips in this article will help you avoid the most costly renovations and maximize your ROI on your investment property.