Why Should You Renovate Your Rental Properties
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Starting this week, I will write a series of blog articles on optimizing rental property renovations. This is a very broad topic and I have many experiences and recommendations to share. So I will break it into multiple articles.
Today, I will start with why most properties require some amount of renovation.
The goal of real estate investing is financial independence. Financial independence requires rental income that meets many requirements, including reliability. This income must continue without interruption, even during economic downturns.
To have a reliable income, you need your property to be occupied by what I call a reliable tenant. A reliable tenant is someone who stays many years, pays the rent on schedule, has a secure job, and does not damage the property.
To maximize your odds of always having a reliable tenant, your property must attract a tenant segment with a high concentration of reliable people. You attract a reliable segment through a combination of buying a property that matches the housing requirements of that segment and correctly renovating the property to increase the desirability to that segment. What you like or do not like does not matter. Only what the target tenant segment likes matters.
Renovation is the process of modifying a property to increase its desirability to a specific tenant segment.
Unfortunately, many investors focus all their attention on finding and acquiring a “deal”. Treating renovation as an afterthought. They then either under-renovate, refusing to spend necessary funds or over-renovate (often to their own taste), spending much more than necessary. The results are often undesirable tenants, high vacancy costs, frequent turnovers, and high repair costs.
Renovation can’t be an afterthought—it must be an integral part of the property selection process. And by the time escrow closes, renovation should be simply a matter of execution. This is what we do on all properties.
Remember that we target a narrow segment of the tenant population: tenants who stay many years, always pay rent on time, and take good care of the property (if you want a refresher on why, check out “How We’ve Kept Vacancy Rates Below 2% for Over 16 Years”.).
How do you increase a property’s appeal to a specific tenant segment?
You need to first understand how people find a place to rent. Prospective renters follow a two-step process.
- Housing requirements: When searching for a rental property, the first step is to eliminate all properties that don't meet their housing requirements. For example, a family of four will not consider a one-bedroom condo, and a single person or a couple without children is unlikely to consider a four-bedroom house in the suburbs. If their budget is $2,000/Mo, they will not consider properties renting for $2,200/Mo or more.
- Satisfying “wants”: Next, they order the conforming properties based on how many of their "wants" each property satisfies. For example, one tenant segment might “want” bars on the first-floor windows, and another might want stainless steel kitchen appliances. “Wants” are different for each tenant segment. Also, it is unlikely that any property will satisfy all of a segment’s “wants.” So, renters must choose the property that best matches their housing requirements and satisfies the most “wants.”
Fortunately, we’ve spent years researching our target demographic and have a good understanding of their “wants” and a method for monitoring the evolution of their “wants.” This is what we base off for the renovation items that we recommend.
Next week, I will talk about the importance of standardizing rental property renovations.
