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Property Updates & Return On Investment

Here is the question, “If I pay for a major update to my investment property, how much more can I demand in rent?”   

The first thing that comes to mind whenever I’m asked this question, is a favorite book of mine called Outliers by Malcom Gladwell.  Although this book is a study on the subject of success – there is something that Gladwell mentions in the chapter where he reviews IQ and the correlation between IQ and success which has a few parallels to this topic.  Specifically, Gladwell reviews IQ and the difference between some with a low IQ, an average IQ, and a high IQ.  In his review, he determines that when comparing people with low IQ to those with an average IQ, there was a quantifiable difference in the percentage of people who find career success between them.  Surprisingly though, Gladwell found no quantifiable difference between the success of those with an average IQ and those with a high IQ (geniuses).  So in his conclusion, he determines that you don’t need to be a genius to have an average chance at success, ‘you just have to be smart enough’. 

Similarly, in the rental world, I’ve not seen properties with new carpet and new appliances rent for substantially more than those without new carpet and new appliances.  The difference between what a property in good condition without many updates, and what a property in great condition with a lot of updates can demand is not as quantifiable as most might imagine.  So, why would updates positvely impact the ROI for a home that is selling, but not so much for a rental?  I have to assume that it is connected to the mindset of a renter.  Renters are not generally looking at the quality of finishes and fixtures, they mainly just want a place that is in good, clean condition that they would be comfortable living in for a year or three.  For those few tenants that are looking for an updated home, they are shopping based on the homes age.. so a home built in the 1950's which has been completely renovated isn't even on their list.  Adversely however, a property that is in below average condition, with carpet stains, dented up wood work, an odor or worn out and scuffed paint, will not be able to demand the average+ rental rate that you might want.  Unless of course you have low standards for who you approve.. poorly qualified tenants are much more willing to pay unreasonable rental rates because they either can’t get approved through anyone listing at a reasonable rate, or they haven’t done enough research to determine that you are overpriced (which may be a reflection on to why are they are poorly qualified to being with). 

However, this is not to say that putting your rental property in excellent/updated condition is a waste of money.  Generally, properties with these little upgrades tend to attract better tenants, who return the property in better condition and who rarely default.  So, as a landlord, you really don’t want to go overboard, but having the home in above average condition for the area is a philosophy that will probably pay off when considering the big picture - even if it doesn't directly affect the monthly rental rate by much.  Experience can be very valuable in making these determinations.  A home renting for $700 a month in a rough neighborhood isn’t going to benefit much from having granite countertops.

Most experienced landlords would agree that the best way to manage a rental property is to slowly and regularly improve it at select intervals; perhaps every time it is turning over (between tenants).  Maybe this time you'll get a new refrigerator, and next time you'll put in new light fixtures, and then you'll do switches and outlets the time after that.  If this approach is not adopted, the home/investment will naturally go down hill and impact your return on investment by attracting a lower quality tenant.