Rental property is an investment. Keeping the property well-maintained and in good condition is the best way to attract and maintain quality tenants, and one of the best ways to do that is by regular property renovation and upgrades.
All real estate investors set out to protect their investments, and rental properties aren’t any different. Sure, rental property upgrades might mean spending some money on regular maintenance or capital expenditures, but the result can be an increased ROI on the investment property.
Here are some things to think about when considering the benefits of rental property upgrades:
- Increased rents: When investors upgrade their rental property, they’re more likely to be able to increase the rent because updated properties are more appealing to renters.
- Reduced vacancy rates: A well-maintained and updated rental property is less likely to sit empty because renters are more likely to choose to move into or stay in a property that is in good condition.
- Improved tenant satisfaction: Tenants who are happy with their rental property are more likely to renew their lease rather than move out—reducing turnover and saving the investor time and money.
How to Calculate ROI on Rental Property
Rental property investments can generate passive income for real estate investors and build wealth over time if the properties are generating a good ROI. This begs the question—what is a good ROI for a rental property?
Real estate investors should consider several factors when determining an ideal ROI for rental property. Investors typically consider the location, property type, local market conditions, and investment goals when calculating ROI on rental property.
Generally, a good ROI for rental property is 8 to 12%. However, many investors aim for even higher returns. So, how do investors calculate ROI on rental property? They use a simple equation: ROI = Annual Returns/Cost of Investment.
For example, if an investor purchased a rental property for $400,000, paid $15,000 in closing fees, rehab costs, etc. and charged tenants $2,500 in monthly rent, their ROI would be 7.2%.
Rental Property Upgrades to Invest In for your Rental Rehab and Hold
Property renovations and construction are great ways to increase the ROI on rental property. However, it’s important to remember that not all upgrades are equal. Some rental property upgrades will add value to a property and/or allow you to increase rents, while other upgrades won’t make much of a difference.
Here are some of the best upgrades for rental properties:
Two types of rooms essentially sell houses to both homebuyers and tenants: kitchens and bathrooms. So, it’s no surprise that the greatest home improvement ROI coincides with remodeling the bathrooms.
Remodeling a bathroom doesn’t have to be a huge job. Start small – swap the shower head with a rain shower, replace the vanity, and update the lighting to make things brighter. Those are simple upgrades most renters will appreciate. Pictures of a new bathroom will attract attention to your listing and allow you to charge more of a premium in rent.
If the property has room, real estate investors should consider the addition of a deck, patio, or porch. An exterior structure like this can add a lot of perceived value to a home by increasing the usable living space in each yard.
A minor kitchen remodel can boost an investment property’s ROI without demolishing an entire room. Refinish the cabinets instead of replacing them; adding a fresh coat of paint and updating hardware can make them look new at a reasonable cost. If the numbers justify spending more, upgraded appliances and new countertops can completely transform the kitchen.
Finishing the Basement
Remodeling a basement can add significant square footage to a home, adding to the usable living space and making your rental more appealing to a wider variety of renters. Many renters will pay a premium to have a space that can be used as a guest bedroom, children’s playroom, or man cave—which can improve your property’s ROI.
Replacing old, worn flooring with new, durable flooring is a great way to improve the appearance and value of a rental property. Many landlords opt for laminate floors that look good and are easy to maintain and clean because they are the most durable and can be used for multiple years and multiple rentals.
Curb appeal – including updated doors, windows, and shutters along with a well-maintained and landscaped yard – will make a great first impression for potential renters. Consider adding new plants, flowers, and trees, and at a minimum keep the lawn trimmed and weed-free.
Each of these rental property upgrades and more are sure to make your rehab or fix and flip stand out while also increasing your return on investment.
Lima One Renovation Loans for Investment Properties
Investment property renovations are a great way to increase the value of any rental property, and investors are using the BRRRR method to secure financing for value-add renovations.
When investors buy an investment property, they take out an interest-only fix and flip loan to cover the cost of the purchase and renovations. Then they refinance to a long-term rental loan with a lower interest rate and full amortization.
As the premier lender for real estate investors, Lima One offers the best loans for real estate investors from simple bridge loans, rehab and fix & flip financing, and stabilized multifamily loans to the most complex structured finance solutions.
Lima One Capital offers loan options such as ARMs and even interest-only periods to help you maximize cash flow after you refinance your rental property. We also offer discounts on rental loans for investors who finance the rehab portion of the BRRRR with us, to maximize value for investors.