Buying rental properties that are in a distressed state is one strategy for making money as a property investor. Rental properties that are old or are in foreclosure can often be purchased at steep discounts. Learn what to look for when buying a property, as well as the best strategies for adding value.
Things to Look for That May Increase Rental Values
When considering a potential rental property, there are several factors that could point to a promising investment.
- Neighborhood- Look at the rent prices in the area. Have they been increasing, decreasing or remaining stagnant over the last ten years? If you are buying into an area that is re-gentrifying, you may see rent prices increase substantially within 10 years.
- Rental Demand- Are there a lot of apartment buildings or multifamily homes in the area? If so, the area has a large number of renters and if you are able to make your property desirable, you should have a steady flow of interested tenants.
- Access to Public Transportation- Rentals that are within walking distance to public transportation are in high demand. This includes a bus line or rail system.
- Ability to Add a Bedroom- If you are able to convert a 2 bedroom apartment into a 3 bedroom, you can charge more rent. There may be a dining room or bonus family room that could easily become a bedroom by closing off one wall and adding a closet.
- School District- People want to live in an area with a good school system. People who cannot afford to buy into that school district will rent.
- Job Market- Are jobs attracting people to the area? Has a large corporation just opened a headquarters nearby? Are employers easily accessible from the area, either by car or public transportation?
- Available Parking- Does the property offer off-street parking, either in the form of a driveway or small lot? You can charge tenants a monthly parking fee or just factor it into the monthly rent.
- Outdoor Space- Outdoor space is desirable to prospective tenants, even if it is a shared backyard.
- Laundry on Premises- Having laundry facilities on the property is desirable to tenants, even if it is coin operated.
- Look for Renovations You Can Handle- If you are not handy yourself, or if you don’t have a contractor you trust, you may want to consider properties that need cosmetic repairs, such as replacing a countertop or plumbing fixtures, rather than those that need large scale renovations, such as all new electric. Renovation costs can quickly balloon and impact your ability to make money.
- Buy the Property Unoccupied- It can be a nightmare getting existing tenants to move out. It will be easier to renovate a property that is vacant. You will likely be able to charge higher rents to the new tenants after the renovation is complete than you would receive by increasing a current tenant’s rent upon lease renewal.
Renovations That Help Increase Rental Value
There are many renovations that can help increase the value of your rental. The cost of these renovations will vary greatly based on factors such as the area of the country, quality of product chosen and cost of labor. Renovation cost estimates were obtained from Home Advisor's True Cost Guide,
Add a Bedroom
In units that are currently one or two bedrooms, converting an existing room to an extra bedroom could increase the monthly rent significantly. Check with your local building department to make sure space is up to code, such as proper ceiling height, egress window, and closet.
- Average Cost- $100 if you only need to add a closet. Between $1,500 and $5,000 if you need to go through the building department and add proper egress point.
Bathroom and Kitchen Updates
Bathrooms and kitchens sell properties and they rent apartments quickly as well. In certain situations, it may be necessary to gut an entire kitchen or bath, but this is not necessary many times. Smaller upgrades go a long way to increase value, such as:
- Resurfacing Kitchen Cabinets - Average Cost- $2600
- Replacing Dated Countertops with Quartz or Granite - Average Cost- $3000
- Re-tiling a Backsplash- Average Cost - $1500
- Re-tiling a Bathroom Floor – Average Cost- 100 Square Feet- $1500-$2000
- Re-tiling a Shower Wall- Average Cost - $15-$20 per Square Foot
- Replacing a Dated Bath Vanity – Average Cost Varies- $85- $2000
- Replacing a Toilet- Average Cost- $100
- Replacing Appliances- Average Cost- Refrigerator- $500-$3000; Stove-$650-$2000, Dishwasher- $400-$700; Range Hood- $200-$3000.
- Replacing Plumbing Fixtures – Costs Vary Greatly- $20 to Well Over $1000
- Replacing Lighting Fixtures – Costs Vary Greatly- $20 to Well Over $1000
- A Fresh Coat of Paint – Average Cost DIY- $40 for a gallon of paint, $15 for a paintbrush. Average Painter- $30 an hour plus paint cost and materials.
More Functional Layout
Removing a wall between a kitchen and living room can make the space more functional and more appealing to prospective tenants. You will have to hire an architect to see if the wall is load bearing. If it is, you will have to submit architects plans to the town, take out permits and install proper support to take the wall down.
- Average Cost- $300 to $1000 non-load bearing. $1200 to $3000 load bearing.
Replacing worn carpet, dated tile or installing hardwood flooring makes a huge difference in the value of your rental.
- Average Cost Hardwood Flooring- $5 to $10 per square foot, plus $3 to $10 per square foot for installation.
Replacing plumbing fixtures and lighting fixtures throughout the apartment helps to transform the entire look of the unit.
- Costs vary greatly depending on the quality of the fixture chosen.
Replacing older windows will help prevent drafts and minimize outside noise.
- Average Cost- $300 to $700 per window.
Installing closet systems will appeal to tenants because apartments typically lack storage.
- Average Cost- $1000
A fresh coat of paint can quickly revive a space.
- Average Cost- Interior- $1750.
Install a Dishwasher
Installing a dishwasher can save money in the long run by cutting down on water costs.
- Average Cost- $300 to $700 for Dishwasher. $350 for installation. $150 for a plumber for a water line. $50 to $100 per hour for an electrician for outlet and circuit.
The exterior of the property will be the first thing that the tenant sees. Fences or handrail must be in good repair. Shutters should be painted and properly attached. A fresh coat of paint can brighten the exterior. A few shrubs or plants may help the property feel more like home.
- Average Cost to Paint Exterior- $2,500.
Offering tenants off-street parking is a major benefit. If you are able to expand an existing driveway or add a carport, your unit may command a higher rent.
- Average Cost of Asphalt Driveway- $3 to $4 per square foot.
Renovations That May Break the Bank
Adding to the square footage of the property will cost tens of thousands of dollars initially, but will also increase your yearly property tax bill. You will likely be better off renovating an existing structure.
- Average Cost of Addition- $80 to $200 per square foot.
If you purchase a property that needs to be gutted to the studs, you may quickly be in over your head. Unforeseen structural issues, mold problems, contractor problems and material costs could lead initial estimates to double or triple. If you are inexperienced with large scale renovations, it is best to purchase a rental property that only needs cosmetic improvements.
While high-end materials are beautiful and will help you quickly attract a tenant, you are at risk of over-improving. If all the other rentals in the area are going for $1,000, a tenant is not likely to spend $2,000 a month to live in your rental because of an all marble bathroom.
Less Durable Materials
Rentals take a lot of abuse. Materials need to be aesthetically pleasing, but also durable. Marble countertops look beautiful, but they get chipped and stained easily and need to be replaced.
Replacing Items That Still Have Useful Life
Another renovation mistake is assuming everything needs to be replaced. Many items can be repaired for a fraction of the cost. For example, the property may have an original railing around the front porch with a few missing balusters. Instead of replacing the entire railing, you can have a millworker custom make the necessary balusters for a reasonable price.