If you’ve been here before, you already know that I bought a fourplex, booted out the tenants, remodeled it, and got it all rented up again with really great tenants. The final numbers are all in for the cost of the renovation. Now we can take a look at what it all cost and figure out whether the remodel was worth it. In addition, we can look at whether it’s worth it to remodel rental property in general.
The Initial Inspection During Escrow
Shortly after my offer on the building was accepted, my uncle and I both attended the inspection of the property. I’m really glad he was there. He’s been a real estate broker for many years, and has more experience than I do at evaluating properties.
I’m also glad he was there to help keep me from backing out of the deal. At the inspection, there were a lot of issues that cropped up that I was going to need to tackle. From the outside, it looked like the building was sound, but it just needed a paint job and probably some new windows. No big deal. The interior photos from the listing looked pretty good.
When we got inside the units, it was a whole different story. The good: one of the kitchens had been redone, and a lot of the flooring in the units was tile. Tile is pretty much the best you can get, as long as it’s not cracked or destroyed. It’s really easy to keep clean, and can hold up to tenant abuse for decades.
The bad: well, almost everything else. All of the bathroom vanities were pretty beat up, and the countertops, sinks, and faucets were thrashed. All of the toilets were really old and really, really tiny. Two units were absolutely filthy and had mice and cockroaches. There were doors falling off hinges, holes in doors and walls, and virtually nothing matched (doorknobs, interior doors, ceiling fans, etc.). Window air conditioners, half of them broken, hung precariously out of the windows. The upstairs deck railing was crumbling apart. The list is way too long to cover here. If you want a hint, take a look at the to-do list I started with.
How Much Was All This Going to Cost?
After the walk-through, my uncle and I went to lunch at a nearby burrito joint. We pulled out the draft of the inspection report and looked it over. We spitballed about what to fix and the estimated rough numbers of what it would cost to do it.
I guessed that it would take about $10–15k to replace all the windows and sliding glass doors, and about $5–7k to do the artificial turf, and maybe $10k to paint the exteriors. That came out to about $30k. I thought that I might be able to get the interiors done for about $40k. $10k per unit sounded like a lot to work with. All told, it looked like I was going to be into it for about $70k in repairs and rehabbing.
$70k is a lot of money, especially after I had just committed to buying this building for $950k. I knew I was going to have some cash left over after the purchase, but I wasn’t quite sure how much at the time. Thankfully, I planned ahead and secured a HELOC on my house before I placed an offer on the building. That gave me an extra $125,000 of breathing room.
The Evaluation: Is it Worth It? Or Should I Back Out?
I felt okay about coming up with the money for the project, thanks to the HELOC. But the question nagging at me was “Is this still a good deal?”
I had already negotiated the deal on the fourplex. The real estate agent warned me from the outset that the seller was not willing to fix a darn thing. So it was take-it-or-leave-it. In the beginning, I had negotiated what I thought was a super awesome deal. After the walk-through, it was definitely not the bargain I expected.
I’ll be honest: I had cold feet. This was turning into a huge project, and I wasn’t sure if it would be worth it. There were other already-flipped properties on the market for around $930k, but then again, those buildings were built in the 1960s, versus 1981 for this property. One of the big things I wanted to avoid about 1960s properties is the plumbing. Galvanized on the supply side, cast iron on the drain side = rusted out pipes in the slab, leaks, clogged drains, and possible settling/foundation issues. Just a quick visual reminder of the mess I’m trying to avoid (see photo to the right):
I asked my uncle if he would walk away. He said no. It was a lot to do, but he didn’t see anything that would be a deal-breaker for him. We penciled it out:
The cost: $70,000 (estimate)
Current rents: $5,200 per month ($1,300 per unit)
Estimated new rents: $6,000–6,100 per month ($1,500–1,525 per unit)
Total time to pay off renovations: 6.5–7.3 years.
The thing to keep in mind when you evaluate these things is that the improvements have to last at least as long as the payback period, otherwise you’re losing money. If your improvements last quite a bit longer than the payoff period, then you’re making money.
How it Actually Turned Out: I Went Over Budget. By a LOT.
Well, I’m glad I got the HELOC. I grossly underestimated the remodeling costs. Part of the reason I went over budget is because some new things cropped up during the renovation process. But the biggest mistake I made was thinking I could estimate it all in my head while eating a burrito with my uncle.
For example, when estimating the exterior work, I guessed it would cost $30k for windows, turf, and exterior painting. I neglected to include the deck resurfacing ($1,730), garage doors and openers ($3,620), and termite tenting ($2,500). Oops. And then there were the issues that cropped up during the renovation, like the crumbling deck railing, the tubs needing reglazing ($2,225 for that alone), and the last-minute plumber costs for replacing all the tub spouts.
The total renovation costs came to $108,435.55. To be fair, some of those costs were for tools or supplies that I still have left over. I set up a pretty decent supply/work area in the small utility room located behind the laundry room. But still. That’s almost $40k over my estimate.
But I Got More Rent Than I Expected!
The good news is that I ended up getting more in rent than I had initially projected. I was thinking I might get $1,500–$1,525 per unit. While we were working, some of the neighbors approached me and asked how much the units were going to rent for. I figured I’d stretch the price and see what their reaction was, as a test.
I told the first person that I’d probably rent the smaller unit (2 bed 1 bath) for $1,550, and probably $1,600 for the larger units (2 bed, 1.5 bath). He said he was interested. Well, now I knew that I could probably charge about that much. I might have been able to stretch for even more rent, but since I needed to fill all four units fast, I didn’t push it. If one unit comes vacant in the future, I will probably stretch a little and see what I can get.
I ended up renting the units for a total of $6,375 per month, instead of the $6,000–6,100 I projected. So even though I went over budget by quite a bit, I am still in the ballpark for the payback period at 7.66 years.
The types of improvements I did should last far longer than the 7.66 years on average. The new toilets, ceiling fans, bath hardware, interior doors, windows, stoves, range hoods, cabinets, etc. should last at least 15 years. That durable vinyl wood-look flooring will probably last about 15 years, too. The only items I can think of that likely won’t last at least 7.66 years are the interior paint (typical life – about 3 years) and possibly the window coverings (10-15 years if used and cared for properly, or 3-5 years if abused by tenants). But those are regular maintenance/replacement items I’d have to pay for anyway.
Is It Worth It to Remodel Rental Property?
Before you put money into remodeling rental property, it’s a good idea to run the numbers. Estimate the costs and the new rent amounts, and figure out how long the payback period will be. Make sure you’re evaluating whether you think the improvements are likely to last at least that long.
Also, consider whether some of the improvements might save you money in other ways. For example, I replaced the greenbelt at the property with artificial turf, and planted drought-friendly plants that shouldn’t need any additional watering. I’m saving on the water bill each month, and virtually eliminating gardening costs. If I consider the roughly $100/month I’m saving on water and gardener costs, I have actually reduced my payback period to about 7.05 years.
Another consideration is whether stepping up the look of the property will get you better tenants. Good tenants are worth their weight in gold, especially if you’re managing the property yourself. They will cause less trash on the premises, they will take good care of your property, and they will cause a lot less drama than less qualified tenants.
Overall, I’m happy with the remodel. It turned out great, and I ended up with some really awesome tenants. The rents are good, too, and I think the resale value of the building ended up increasing by almost double the amount of money I put into it. I might do a post on that later.
Have you ever rehabbed a rental property, and if so, did it turn out to be worth it? Would you have bought a rental property like mine, and if so, would you have renovated it or left it as-is? Before and after photos are here and here, in case you need a refresher.