Author: Alex Delaney
Your first order of business in rental property is making your property desirable to renters without breaking your budget. The best way to determine what to spend on improvements starts with a critical assessment of your property and the surrounding properties. Generally, there are three classes of properties:
“A” properties are high end, usually larger, modern homes in good areas.
“B” properties are median value homes in decent areas.
“C” properties are lower-valued properties, often in less than desirable areas.
You can have a “C” property in a good area. By judicial renovations, you can bring that property up to an “A” level. But you cannot bring a “C” property up to an “A” level if it is in a “C” area, so you would not want to spend funds increasing the value of a “C” property that you cannot hope to recoup with rent.
As “A” properties are generally less than 15 years old, maintenance costs should be well contained and tenant turnover is usually very low. To consider putting money into “A” properties, you want to look at the competition and make sure your property is offering the same amenities. The goal of this type of property is to maintain its level of quality and evaluate improvements to keep its competitiveness. Beyond that, you are wasting funds.
“B” properties, the next level down, are usually well-maintained properties, but a bit older than “A” properties. While you want to use the same strategy as with “A” properties, the cost outlay is going to be larger due to aging systems and structural issues due to settling. Yet the income potential is going to be lower, so you don’t want to put yourself in a position of outspending your earnings unless you can change its status. If the area is still solid, and the property might be brought up to the “A” level with improvements, it is worth the added cost as an “A” level property will bring in better earnings. But if the area is solidly “B”, then keeping renovation funds focused on structure and competitiveness is the best route.
“C” properties usually have higher maintenance costs, higher turnover costs and bring in less revenue. Located in less than desirable areas, these homes are usually 20 or more years old and face many upkeep issues, such as roofing, HVAC, structural settling, and other aging issues. That said, you can’t neglect C properties as you are still competing with other rentals in that area. While you should focus on capturing prospective tenants’ attention, it would be a mistake to perform any expensive upgrades that will require future repairs. In other words, unless it is an upgrade that propels the property into a “B” level or an upgrade that won’t cause future repairs, don’t waste your funds.
Vacancies are costly. So the main issues with all levels of properties are attracting quality tenants quickly and keeping them in place.
Enticing New Tenants: You’ve heard the term “curb appeal.” There is a reason this term is batted around on a regular basis. First impressions lead to further interest or stop people in their tracks. Look at your property from the curb. Is landscaping neat? What can be done to spruce up the front? Perhaps a great color on the front door, or low maintenance bushes along the front. Neat, stylish street numbers are relatively inexpensive, yet can add an element of elegance to a home.
Does the home show dirt on the lower level? Pressure washing is a low-cost way to brighten up a home. If your property fits under the “A” or “B” list, make sure the street view is up to par with the neighbors. Now, check out the competition. See what other rental homes in the area offer. Kitchens and bathrooms are the main rooms to focus on. “A” and “B” level properties should have new, or newer, kitchen appliances, preferably in chrome or black. Kitchen counters should be granite or a good composite. If the “B” level property is still sporting walnut cabinets from the 80s, it is time to pay for a refacing or fresh paint. Consider replacing hardware for a fresh, modern look in the kitchen and bathrooms. Nothing dates a property faster than dingy, aging hinges and pulls. And if that bathroom is plagued with pink or green tile, consider ripping it out and replacing with stone tile for “B” homes, or painting the tile for “C” homes.
Flooring can be a huge expense, and constantly replacing it at turnover can wipe out profits. Consider ripping out that matted carpet and replace it with a higher-end product that can handle abuse, such as hardwood for “A” properties, and laminate or tile for “B” and “C” properties. Your prospects will love it, and the initial investment will pay for itself at turnover time.
Keeping Tenants: When renewal time comes around, you don’t want your tenant even thinking about moving and creating the need for a costly turnover. Moves are expensive and a happy tenant will stay in place for years if the property continues working for them. So how do you keep your tenant happy?
Consider incentives around renewal time. Before that renewal notice goes out, take stock of your property and consider offering your tenant an upgrade that fits within your budget, but is nice enough to wipe away any thought the tenant might have of moving.
“A” level properties should already have attractive kitchens and bathrooms. But what about the windows? Are they well insulated? Is the deck aging, or is there a deck? What is the storage situation? For “B” properties, consider adding extra storage via a new shed, or shelving in the garage. “C” properties may benefit from security measures such as additional lighting in the back and sides of the property or installing a security system. If the “C” level windows are old, consider offering to replace a set of windows a year until they are all replaced.
Now that you’ve done your homework, your property is rented and in good shape and your tenant has signed another year’s lease, sit back and reap another year of stress-free rental income.