Buying real estate is an investment activity whether the property is one you intend to use for yourself or one that is strictly investment focused. In both cases, you make the acquisition with the expectation that you will be building equity over time. However, the financial stakes are higher with investment property because there are specific yield expectations to justify the costs of holding and maintaining the property.
Return on investment may be realized in different ways:
- Short-term business plan – Choose investment property that requires cosmetic upgrades only, complete the repairs and renovations and sell or flip the property.
- Medium-term business plan – Choose investment property that is deeply discounted due to the need for major upgrades. These houses may be offered as short sale, foreclosed or a bank-owned property. Undertake the required renovation and market the property shortly after.
- Long-term business plan – Buy and hold the property, marketing it as a long-term or short-term rental to create an income stream that should pay for maintenance and improvements, plus profit. Under this strategy, you will also benefit from higher property values when it comes time to sell.
Home Improvements that Pay Off
According to HGTV, not all home improvement projects are created equal in terms of how much value the completed project will add to your property. Obviously, priority should be given to projects that are structural, regardless of expected returns, to prevent further damage.
- Minor bathroom face-lift that may include re-tiling, re-caulking, bathtub re-glazing or replacement will pay back as much as 102 percent of the costs.
- Landscape redesign that includes weeding, mowing, cleaning shrubbery and incorporating new landscape plants will pay back as much as 100 percent.
- A Minor kitchen remodel that may include re-grouting, some tile replacement , minor cabinet and appliance upgrades is expected to pay back as much as 98.5 percent of costs.
- Improvements on the exterior of the house to improve curb appeal may include painting, replacing vinyl siding and upgrading the front door will pay back about 95.5 percent.
- A bedroom conversion such as turning an attic into living space may yield 93.5 percent.
Renovation Projects for Investment Properties
The amount and type of renovations that property owners should do on investment properties will depend on the business plan for the particular asset.
Fix and Flip Projects
If your goal is to make a quick profit and realize your expected ROI through a fix and flip strategy, prioritize the projects that will ensure compliance with local building codes regardless of how much the expected payback will be after completion. Ensuring that the property meets occupancy standards will immediately increase the home’s value.
After these projects are completed, make sure to pay attention to improving curb appeal. These projects include landscape improvements such as trimming, re-planting and mulch application. Curb appeal can also be enhanced with a basic paint job on the exterior, including window trim, shutters and the front door. After completing these improvements, you may find yourself reconsidering your decision to sell in favor or using the property as a rental.
Income-generating Properties
If your investment property was always intended as a rental, make sure to verify that your rental plans are consistent with local zoning guidelines. Some homeowners’ associations may regulate rentals, and some zoning restrictions may prohibit short-term rentals for vacation property. These are some of the most common projects to enhance property value.
- Curb Appeal Improvements
A priority renovation for rental housing includes upgrading curb appeal. In doing so, focus on low-maintenance features for the landscape such as adding perennials instead of annuals, hedge and tree-trimming and mulching. Also consider cosmetic improvements on the exterior of the house because you have to post pictures on various real estate websites, and you also need to capture the interest of each prospective tenant when they come for a visual inspection.
- Focus on the Floor
Rental properties may have a high turnover of occupants, and the floors will bear the brunt of moving in and out. Make sure that the floors are made of high-stress yet easy-to-clean materials such as tile or polished concrete. Wood floors enhance the appeal of any home but may not withstand high traffic and the stress of heavy furniture. Tile or polished concrete are the preferred floor coverings for investment property because they are relatively easy to maintain. Carpet is definitely a no-no for rentals because they tend to hold dirt, wear out easily and may require replacement between tenants in long-term rentals.
- Kitchen Upgrade
Some improvements in the kitchen will enhance property value. New, energy-efficient appliances make it easier to market the property as this is that part of the house that people tend to focus on. Replace the kitchen counters with affordable smooth-top materials, and reface kitchen cabinets to freshen up the kitchen. Small projects such as the installation of new and modern cabinet hardware are some of the things you can do yourself that will impact your ROI due to higher rental rates, easier marketing and fewer downtime days for your investment property.
- Bathroom Facelift
Bathroom improvements add value to the property especially if it means improving outdated and obsolete amenities to modern ones. Re-tile the bathroom for a quick facelift, and replace the fixtures with modern ones. Install a new vanity with modern lighting to give the bathroom a new look. Replace cracked or damaged mirrors with a framed mirror.
- Heating and Air Conditioning System
Residential units should have efficient heating, ventilation and air conditioning systems all the time. Add value to your property by ensuring that the HVAC system works as expected. Inadequate climate control in your investment property may lead to problems such as mold and mildew, poor air quality and the accumulation of odors.
Local Factors to Consider
It is sensible for property owners to consider local conditions that may affect the marketability of the property and the safety and comfort of tenants. When prioritizing the remodeling projects for your investment property, make sure to account for local weather conditions. Storm shutters should be made available for installation in blizzard or hurricane-prone areas. Add high-grade insulation if your investment property is located in areas that experience extreme weather conditions.
The local community will also appreciate property owners who remodel their investment property to be consistent with the local color, theme and standards. An ultramodern structure in a neighborhood of Tudor-style homes will not be welcomed even if you can get past the permitting stage.
There are various ways to add value to investment property, depending on how you plan to use the asset. Remodeling projects should first focus on functional and structural projects before cosmetic upgrades. The listings on Auction.com will give you an idea of the return on investment potential on properties that may need some repair and renovation before they can be flipped or rented. Check out available investment properties in your target area.
