Using Average Rental Prices to Figure Out Your Renovation Budget

 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.

 The Takeaway

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.

The Best Way to Handle Annual Maintenance with a Long-Term Tenant

Property Maintenance

Properly maintaining investment properties has two main benefits:

• Good tenants value the care and consideration, so are more likely to re-sign a lease and stay.
• Well-maintained properties keep their value better, and are less likely to suffer electrical, plumbing, or appliance failure that demand emergency repairs and unexpected costs.

Good maintenance, therefore, has a number of benefits. Keeping everything in good condition takes some simple planning and setting sensible standards. In this article we will walk you through the why, what, and how of the topic.

A Landlord's Legal Responsibilities

Firstly, every state has legal requirements that landlords must follow. Investment properties must be habitable. Basically, that means the property must meet certain standards for a tenant's safety and health. As well as state regulations, each municipality may add their own standards, so it pays landlords to know what is required, and to stay on top of making sure their properties meet the standards.

Lease agreements cannot change standards or legal responsibilities, but they can state what the landlord or the tenant will deal with. Will the landlord replace light bulbs, for example, or will the tenant? The important thing is that, in this case, the electrical supply is safe and functional.

Maintenance Inspections

Because landlords have legal responsibilities, the lease agreement should:

• Refer to those responsibilities.
• State there will be periodic maintenance inspections. You may inspect quarterly, for example, but generally carry out routine maintenance annually or semi-annually. The inspections should forewarn of possible repairs that are due.
• How much notice the tenant will get before an inspection. Entry into a tenanted property will be governed by local regulations, so it may be a minimum of 24 or 48 hours.
• Who will notify the tenant, and how - email, letter, phone call, etc?
• What will happen if, for good reason, the inspection cannot be performed.
• Outline what will be inspected, how it will be inspected, and by whom. This stops a tenant from objecting to how long an inspection takes or which rooms will be included/excluded for, and who can enter their home to do the inspection.

Property Managers and Professional Inspectors

Some landlords have a total hands-on approach. Others hire a professional property manager and licensed contractors. The advantages of using professionals is that they are experts, they have their routines in place, and will have a good working relationship with licensed and experienced contractors.

Everyone will be used to handling actual and potential problems. On top of everything else, everyone involved will know the standards, rules, and the expected degree of formality and etiquette when going into properties and dealing with tenants.

The Takeaway

Routine maintenance is a great way to adhere to legal requirements of habitability and safety, and should keep unexpected repairs to a minimum. By including the details in the lease, it implies both good customer care, and avoids any conflict or misunderstanding. By hiring a property manager, the landlord can leave the hassles to an expert.

Why Investors Should Use a Home Inspector Who Works to ASHI Standards

Introduction

To an investor, a residential property is a source of wealth creation, revenue, and profit. It is also someone's home and an obvious part of a community or neighborhood. Most investors want to buy a property at the lowest possible price to maximize immediate equity ownership and potentially maximize their capital gain when they sell. Buying a low-cost property that then presents enough serious safety or functional problems for an investor to regret the purchase should obviously be avoided. For that reason, investors should give serious consideration to using a home inspector who works to ASHI Standards.

ASHI: The American Society of Home Inspectors

ASHI was founded in 1976 by a group of home inspectors who wanted to build consumer awareness and enhance professional standards. These standards are, according to ASHI, the most rigorous standards set by any home inspection organization and have been made part of many states' legislation.

ASHI Inspectors

In many states someone can become a licensed home inspector after successfully completing an online course. Completing a course is not the same as having personal inspection experience and does not imply keeping up with code changes or other matters that may affect a building. This is not to be critical - everyone must begin a career with little or no practical experience. The underlying point is that if an inspector is linked with ASHI it says a lot about their intention, abilities and experience. For example:

• An ASHI Associate Inspector will have passed ASHI's Standards of Practice and Ethics module, must agree to work to those standards, and must complete 20 hours of continuing education.
• An ASHI Inspector must have passed the National Home Inspector Exam or other approved state exam and must have completed at least 75 home inspections that meet or exceed ASHI standards (submitted via authorized and notarized affidavit) and complete 20 hours of continuing ed.
• An ASHI Certified Inspector must have passed the exam, completed at least 250 inspections to ASHI standards and complete 20 hours of continuing ed.

 The Takeaway

Protecting oneself from unexpected costs resulting from current or potential future functional or safety defects is part of making a sound investment decision. Having a property thoroughly inspected to approved standards by a dedicated and experienced home inspector is part of it. There are many highly competent home inspectors who are not ASHI members, and many investors have built a good working relationship with them over the years. If someone is new to real estate investing, it makes sense for them to use a home inspector who you know works to ASHI standards.

Investing Part Four: The 1% and 2% Tool

The 1% and 2% Rule

Many investors use these quick calculations when they first see a potential property. We explained the rule and the calculations in one of our previous blogs, "Should you Follow the 1% or the 2% Rule?" In this blog we will broaden the discussion. Successful investors work to a longer-term game plan, and they bring other factors into the purchase decisions. The 1% and 2% rule delivers a sort of "screenshot" – the purchase price and initial renovation costs times 1% or 2% equals monthly rent to charge. This rental figure can be compared to how much competitor landlords are charging for a similar property, and how the current market is responding to those rent levels.

9 Additional Factors to Consider

These additional issues help an investor to make a sound purchase decision:

1. Will this property support, strengthen or weaken the total portfolio in terms of clear equity, future equity growth, and monthly cash flow?
2. How will buying this property impact, say, sleeping partners or other financial commitments?
3. Has the property inspection been done and, if so, has it exposed future maintenance or replacement costs that are not part of the initial repair/renovation expense used in the 1%/2% calculation?
4. If the property has current tenants, what is their on-time rent payment and care-of-the-property track record?
5. When do current leases expire, and how likely are they to renew or move out?
6. Have current tenants made any unapproved or "unique" alterations that may need "correcting" should they not renew their lease?
7. How is the neighborhood changing? Will future tenants be able to pay higher rents or expect to pay lower rents than current lessees?
8. When are sitting tenants likely to vacate in the context of neighborhood changes and changes to market rent levels?
9. Are current local employers moving into or out of the neighborhood, increasing or decreasing productivity and hiring practices? How will those economic shifts impact future rental levels and potential vacancy rates?

Summary Comments

The 1% and 2% calculations are valuable for "right-now" decisions and to get an immediate screenshot of an investment opportunity, but they are just that. They do not, and are not intended to, enable a broad-based final decision to buy-and-hold or to pass. Investors who plan their investment strategy several transactions ahead, factor in some or all of the above nine points.

The one possible exception to just using the 1%/2% rule may be where an investor is nearing the 45 day deadline to name potential acquisitions in a deferred 1031 Exchange. When you are under the gun and must choose something to roll capital gains into, knowing you will flip it as soon as the time is right, the simple rule may be good enough.