Smart renos for an investment property

Renovating an investment property is a tough balancing act. You want to do enough to make it attractive to renters, but not too much that it ends up costing you more than what you’ll see in returns. When renovating a property that isn’t your primary residence, there are many more things to think about than just whether or not you’ll like the way it looks.
 
Look at your ROI
 
When working on a property that isn’t owner-occupied, the criteria for making renovation decisions are a little bit different than it would be otherwise. Sure, you want your property’s value to appreciate in both instances, but when renovating an owner-occupied property you also can make choices that more closely reflect your personal style and taste than you would otherwise. When renovating an investment property, you have to pay much closer attention to your return on investment (ROI) and how much of those costs can be recouped with rental income.
 
According to Genworth Canada, the following renovations are the ones that get you the most for your money:
 
  • Hardwood and tile flooring
  • Fixtures, including hardware, lighting, and faucets
  • Bathroom updates
  • Kitchen updates
  • Rental suites
 
But all renovations aren’t created equal.
 
Are those renovations necessary?
 
Sometimes renovations are necessary because a property is unsafe and/or inhabitable. Issues such as rotting wood, leaky pipes, and untreated pest infestations can cause long-term damage to your property. Something like old electrical wiring such as knob and tube, for example, often deteriorates over time and may result in short-circuits or overheating, either of which could start a fire. Contaminants like mould and materials with asbestos, can post a health risk to a tenant as well, which is no good for you. These types of problems should be remedied immediately.
 
“People talk about slum landlords out there [who] don’t do anything, but there are plenty of landlords out there who just glaze over issues because plumbing is an expensive call and to get somebody to come out and fix something is not cheap,” says Alan Macdonald, a real estate agent in the Greater Edmonton Area. He says that plumbing specifically is a big problem when it can often be an easy fix. “What will happen is, if [fixtures] don’t work, you’re just going to get a bunch of phone calls for plumbing that doesn’t work or make your renters feel like you don’t care about their plumbing, which is actually a really important part of renting . . . if they feel like you don’t care then they might not treat the place with the respect that you are looking for.”
 
Low maintenance
 
When you’re looking to renovate a home that you’re not going to be occupying, you want it to be as low-maintenance as possible. As you’ve seen above, hardwood floors provide a good return on investment, but they’re also much easier to clean than carpet – and you won’t have to replace it due to wearing or staining. Good tenants want to feel that the space is clean, and even though a carpet may look clean, there could be plenty of dirt and dander lurking in the fibers. Laminate floors are a good alternative to hardwood floors at a lower price point.
 
“People who rent want to have a nice place to live like everyone else, so I usually recommend people will have a nice floor in a house so that people feel like they have a place that’s cleanable,” said Macdonald, and that includes things like using durable paint that can easily be wiped with a  damp cloth.
 
Outdoors, making low-maintenance choices may mean incorporating a rock garden or native plants for landscaping, while inside that may mean durable finishes, counters, and flooring. Remember, less maintenance for the tenant also means less maintenance for you: no mowing the lawn or replacing materials frequently if they get damaged.
 
And while your investment property might not be your primary residence, it will still need a certain amount of upkeep, regardless of how you choose to renovate it. You want to make sure that the little things are taken care of, so that your time, energy and money can be spent on things you can’t afford, like maintaining the roof and the heating and cooling systems.
 
Know your audience
 
You’ve probably heard that you shouldn’t buy the best house on the block. You also shouldn’t renovate the house on the block to a caliber that’s higher than the block can support. You have to know your neighbourhood well, and what the rental market is like in that area. You may renovate your unit to the point where it will rent for $1,500 in an established part of town with a central location, but on the outskirts of town in an up-and-coming neighbourhood, you may not get more than $1,000 for it. Putting more money into an investment than you’re going to get out of it is a big investment blunder.
 
You also have to look at the demographic of the people who are most likely to rent your space. Students, for example, aren’t going to pay top dollar for a property that’s far from campus (if they’re going to pay top dollar at all). Do you even want to market your unit to students, who want something cheap and cheerful but may only rent the space for a year at a time, or would you prefer to cater to young professionals who like to see slightly nicer digs that may require a bit more work on your part in exchange for a higher rent? Decide which renters would fit best in your space and neighbourhood and renovate accordingly.

Macdonald says that he’s shown many properties where the renovations are just too nice, and if anything gets damaged, the landlord would have to tear it all out and start again, which translates to wasted money.
 
“Renovating for yourself, you can certainly use high end materials if you think that the people in your family are going to be careful with it,” he says. “Renovating for renters, it’s not typical that you’ll get a lot more rent for using the best material and you might end up with damage, which could occur anyway, but people who don’t own something don’t usually treat it quite the same . . . that isn’t to say that they’re doing it on purpose, but they don’t really think about the costs of it. They’re not going to respect it the way you would.”
 
Keep it simple
 
Apart from doing necessary health and safety renovations, investment renovations as a whole should be mostly cosmetic. A good paint job and nice lighting fixtures can go a long way to making a space feel attractive and welcoming. But if you’d like to do any more intensive work, like removing walls to change the layout or putting in energy-efficient upgrades, you may be veering into Not Worth It territory.
 
“There’s really not much point in doing that if you’re not paying utilities. New windows, for example – if they’re functional and you’re going to save just a little bit on gas every month – if the renter is paying that gas bill, that doesn’t really doesn’t benefit you as a business owner,” Madconald says. “Same with replacing a furnace: if it works fine, there’s really no reason to change it out. They often take a very, very long time to actually pay themselves off. That’s great if you’re going to sell because a buyer is going to really look at that kind of thing and then feel good about the future of that property, but in reality, it’s not really going to benefit the renter much utility wise and it’s not going to benefit you.”
 
Although you want to make sure that any renovations that you undertake make sense financially, you want to avoid paying the bare minimum for any contract work or getting the lowest-quality supplies. If you use items of pooper quality, they’ll usually wear out quicker and you’ll end up having to replace them more often than you would do otherwise. There also tends to be a better ROI for mid-range items as opposed to top-of-the-line finishes, and because of this, Macdonald recommends that landlords sticks to the idea that a space “needs to be functional, it doesn’t need to be fancy.” The exception to this instance would be if you’re working with a luxury rental or an executive/long-term rental.
 
When to renovate?
 
Many landlords – and homeowners – want to renovate soon after closing on the property so that they can get everything done before they move in or before they advertise for tenants. But if you’ve already got a tenant or have interest in the unit, it’s always better to get the unit cash flowing. You may anticipate receiving more rental income for the space post-renovation, but nothing’s a sure thing, especially since renovations may take longer than expected, and the longer they take, the longer you’ll have to shoulder the cost of the unit.
 
That being said, sometimes you can’t put it off. Structural renovations, or anything that would directly affect the health of a tenant would have to be done before a tenant takes possession of the property, if it’s currently vacant.
 
And if you end up doing large-scale renovations, it’s often better for everyone involved if the unit is empty because of noise, dust, or the need to move furniture and other belongings. Without having to work around someone else’s schedule, chances are that the renovation will take a lot less time than it would otherwise.
 
Smaller renovations can be made while working out an arrangement for time/place with your tenant. But depending on the scale of the renovation and the location and type of property, you may have to pay for the tenant to be temporarily relocated, and the tenant may also be exempt from paying rent during this time. That means more cash out of your pocket. Check the Residential Tenancies Act or other regulation in your area for more information.
 
Again, if you’re currently getting rent, there probably isn’t a need to rush through cosmetic renovations – keep in mind that the current tenant won’t be in a rush to pay more rent even if the space is remodeled, and if they’re in the middle of a lease, you may not even be able to reap the benefits until they move out anyway.
 
It’s a balancing act. While you want to make renovations that will benefit a renter, you also want to look out for number one.
 
“You want to work on things that are going to benefit you in the future and things that are going to benefit you in the future and things that are going to keep the property in good condition,” Madconald says.
 
 

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