After renovating more than 500 single-family rental properties, I want to share a few tips and lessons (some are costly) so you don’t have to repeat my mistakes.
The first and most crucial task in renovation is deciding what to renovate. Should you aim to make your property trendy and flashy, hoping to increase the rent significantly? Or should you spend as little as possible to save money?
Before proceeding, it’s essential to understand the goal of renovation: to increase rent, reduce time to rent, prolong tenant stays, and reduce litigation risk. It’s not about personal preferences since you won’t be living there. Instead, the focus should be on what attracts your target tenant segment.
What Should You Renovate?
I divide potential renovation items into these categories:
- Required items
- Items necessary to attract your target tenant segment
- Removal of unneeded items
- Cost-justifiable enhancements
Required items
Required items are those necessary to provide a safe, habitable living environment. Some renovation items in this category include:
- Smoke detectors must function.
- All windows must open correctly. If they do not, they can be a fire safety hazard.
- The HVAC system must work.
- The plumbing must work.
- All furnished appliances must work correctly.
Items necessary to attract your target tenant segment
When people look for a place to rent, they do not look at every available property. Looking at the rent amount, photos, and location in the listings, they shortlist the properties they will see.
For a property to be rented, at least one tenant must deem it their best fit. If your property isn’t perceived as the best fit for at least one potential tenant, it will languish on the market. Your only option will be to continuously lower the rent until one or more tenants deem it their best fit. Competing on price rarely results in desirable cash flow.
What to renovate depends on your tenant segment and competitive properties. For example, many years ago, a client purchased a rental property. When determining what to renovate, I included the cost of replacing the existing ugly lime green carpeting.
The property manager, aware of market conditions, stated that there was no competition and that the carpeting should not be changed. The property was rented in two days, for more than I predicted.
A few years later, the property returned to the market with significant competition. When the property manager reviewed it, the first item on her list was to replace the green carpet. So, for this property, replacing the carpet transitioned from an unnecessary enhancement to a necessity to maximize rent and minimize time to rent because of competition.
Removal of unneeded items
I have a saying about items in rental properties: “If it doesn’t pay, it doesn’t stay.”
For example, we remove items like Ring doorbells, security systems, water conditioners, monitoring systems, RO systems, and many others because they do not increase rent but will likely result in maintenance calls and higher maintenance costs.
Liability considerations
Liability is an important consideration when it comes to renovations. For example, we are in the Mojave Desert, where cactus-type plants are common. If there are cactus plants close to a walkway, we remove them. A child might stumble into the cactus and be injured, resulting in litigation.
Another example would be an alarm system. If the systems do not operate as the tenant expects, they will likely call in service requests. Also, what if the tenant leaves and does not set the alarm, and while they are out, the property is burglarized? They could sue the landlord, claiming that the system was defective. So, to eliminate related litigation risk, we remove alarm systems.
Cost-justifiable enhancements
Beyond these renovation considerations are enhancements. I do enhancements only if they are cost-justifiable. Cost justification is usually based on the payback period.
For example, during a property manager’s walk-through evaluation of a property, she stated that although laminate counters are normally not acceptable in this community, there was no direct competition, and the laminate was aesthetically pleasing. She could get $2,000/month in rent if the laminate counters stayed or $2,200/month if they were replaced with granite. The cost to install granite counters was $2,000.
What was the payback period for granite counters?
- Payback period = (enhancement cost)/(increased rent per month)
- Payback period = $2,000 / $200 = 10 months
I am almost always willing to make enhancements if the payback period is less than three years. Ten months is a no-brainer.
Where Renovation Goes Wrong
I had a client willing to spend money on renovation items but refused to spend $350 cleaning up the front yard. He said he would not spend another dollar until the property generated income.
The property manager and I believed this property would be difficult to rent unless the front yard was fixed. Prospective tenants would see weeds, debris, and trash when they stopped at the curb. They would assume that if the exterior looked this bad, the interior would not be any better and drive on to the next property.
The property took three months to rent and finally rented for well below market rate. To avoid spending $350, he lost three months’ rent, or about $6,000.
Another common mistake during renovations is renovating according to the owner’s preference rather than following the property manager’s advice. In one instance, the owner insisted on a specific interior paint color (green) because it was trending that year. The property remained on the market until it was finally repainted in a neutral color a few months later.
Setting Renovation Priorities
Renovation is always a balance between cost and return. The best way to determine what to renovate is to divide all potential renovation items into the following categories:
- Required items
- Items necessary to attract your target tenant segment
- Removal of unneeded items
- Cost-justifiable enhancements
Then, spend your renovation dollars on items in this order.
Lessons Learned From Past Renovations
Now that I’ve gone over what to renovate, I will share some lessons learned from completing over 500 renovations, including some costly mistakes.
Document, document, document
This is where things can go seriously wrong. You know what you want and believe the vendor shares the same vision.
Spoiler alert: The vendor has a different vision. The bottom line is that you will not get what you want unless you unambiguously define it.
For example, how would you specify painting the interior of a house?
The interior, ceilings, walls, doors, casings, and baseboards will be painted as follows:
- Walls: Sherwin-Williams White Duck in eggshell sheen. The code is SW 7010.
- Ceilings: Behr Flat White ceiling paint.
- Doors, casings, and baseboards: Swiss Coffee, semi-gloss sheen.
The price will include all labor, materials, surface preparation, and cleanup. All switch and plug cover plates will be removed and reinstalled after painting. All doorknobs will be removed and reinstalled after painting. Doors will be removed, sanded, spray-painted, and reinstalled. The hinges will not be painted.
An unopened one-gallon container of each of the three paint colors will be left in the garage, and the names and sheen will be marked on the top of each can.
Even when I document each task, as I did here, just to be certain, I sometimes have the vendor walk through the property and describe each task, including how they will do it, how many people will be working each day, and approximately when the work and cleanup will be complete. I video this walk-through, and it becomes part of the documentation.
If there are issues with the vendor’s work commitment, I play the video for them. For example, I had one vendor claim that they did not agree to do a task under the contract price. When faced with the video, he did the work at no additional charge.
Creating unambiguous documentation for every item is time-consuming but essential.
Make sure there’s someone to overwatch
We do several renovations each month, so we have a trained team member who overwatches what is happening and takes progress videos. Unless you have a trained person (working for you, not the renovation company) monitoring progress and quality, the renovation will cost more and take longer, and the quality will be less than desired. Also, if the vendor knows there will be frequent inspections, they will do better-quality work and be less likely to play games.
Coordinate your vendors
The order in which work is performed is important. For example, you do not want the walls painted and then have the electrician cut into them to install wiring. Or you do not want carpet installed before the walls and ceilings are painted.
Without proper coordination, your project may encounter issues, leading to increased costs and delays. Consider a situation where one vendor is responsible for painting doors and another for replacing the doorknobs. There’s a high chance you might encounter the painter claiming, “My job was to paint the doors. The damage caused by the doorknob installation is not my problem.” Similarly, the doorknob installer might argue, “I install doorknobs and am not responsible for the paint.” This happened to one of my clients’ properties, and the result was I paid for the repair cost.
In most cases, you are better off having one vendor in charge of all work, even if it costs a little more.
Manage change orders
Every significant change must be documented with a change order. The change order must include a description of the change, any additional cost (labor and materials), and how much more time will be required. If a vendor performs work without a signed change order, we will not pay.
Price is no indication of quality
Some of the worst-quality work was performed by licensed contractors, who charged two or three times what a handyman would charge. Also, the contractors did not even pretend to follow the schedule they signed. We’ve had the best work performed by handymen at much lower prices.
Leverage your team
Many contractors are reluctant to take on small jobs. However, working with an investment team can provide the leverage needed to ensure even small tasks are completed promptly.
Use appropriate vendors
Use handymen to control costs, and only employ licensed contractors when necessary. For instance, you don’t need a licensed contractor to change lightbulbs. We use licensed professionals, such as plumbers and electricians, for tasks when they are truly needed, especially when permits are required.
Prohibit drugs, smoking, or alcohol on site
I’ve fired multiple licensed contractors because workers (and even the supervisor, in one case) were under the influence. Also, the odor of smoking or pot can result in expensive odor removal. Stop this before it happens.
Be licensed and insured
The contract must include a copy of their license and proof of insurance. I’ve encountered many vendors who make ridiculous excuses about not providing their licenses and insurance. If you let people do work on your property without insurance and someone is injured, they will likely come after you. If they have no license, trying to sue them is like catching smoke in your hands.
No license, no insurance, no work.
Pay with a fixed price
No matter how low the hourly wage is, you cannot afford to pay by the hour. If paid by the hour, there is no incentive to finish the job.
Watch out for renovation creep
Do not give in to the urge to make “improvements.” For instance, we use appealing, cost-effective granite for kitchen countertops. One owner was adamant about wanting a higher grade of granite since “he would never live in a property with our standard granite.” This led to a $1,500 increase in material costs, but the rent remained unchanged.
Manage payment appropriately
We pay 50% before the vendor starts work and the balance after final acceptance. If there are significant material costs, we may pay for them, but we never make the final payment until after final acceptance.
Final Thoughts
Renovating can be a nightmare without proper documentation and management. Remember, this is an investment, not an “experience.” Working through an investment team is the best option to complete the renovation cost-effectively and in a timely manner.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
