Originally Posted by John Dessauer on December 14, 2015
Exactly how much renovation should go into an investment property? It can be a tricky decision for the investor. Too much renovation, and the investor runs the risk of not recouping the cost. Not enough improvements may mean lower profits, or a slow sale due to little public interest.
One important factor will be the average price of homes in the area. Careful investigation of home values and sales prices of nearby houses will reveal the average home value of the neighborhood. If homes in the area generally sell around $150,000, don’t plan expensive renovations that will boost the value of the investment property over this figure. Go higher than the average selling price, and there will be lower profits and trouble selling the property.
If the property has been neglected or not updated in years, some carefully chosen renovations may be needed to raise the value of the house to match the rest of the properties in the area. An example of this is a house in an older, but still sought-after area, where elderly residents have allowed the property to become run down. Purchased at a low price and brought up to date with a new kitchen and bathrooms, or even a new roof, such a property would sell for a premium price on the market, yielding a high profit for the investor.
This same strategy would probably not work as well with a newer house, such as a foreclosure. With a new house, there would be more money owed on the mortgage and it probably couldn’t be acquired at a deeply discounted price. On the positive side, a newer house wouldn’t need as many renovations as an outdated home. Usually, a good cleanup and minor repairs will make a new home market ready. However, if a new house has sustained heavy damage from the previous owners it’s obviously not a good investment.
It would be a good idea to visit other houses for sale in the area that are comparable in price and see what features they have to offer. If things like a larger deck or more bathrooms really increase the price of these houses, then such a renovation is worth considering. Get three professional contractors to estimate the job and do the math to see if such changes will make financial sense.
If the house is basically sturdy and in reasonably good shape, but dirty and ugly, a good cleaning and a bit more curb appeal is all the property will need to sell. Things like painting the exterior and interior with neutral colors, new carpet, window blinds, and some attractive but simple landscaping will make the property market ready.
Some properties have the potential to move up a notch or two in price with renovations. A small, old-fashioned house located in the midst of larger, more expensive homes is a good candidate for extensive renovations. Updating and remodeling such a house can really pay off handsomely for the property investor. Remember that old adage, buy the worst house on the best block and you should do just fine.
“Remember, wealth has nothing to do with money, success has everything to do with failure, and life is as simple as you make it.” – John Dessauer