Planning for a remodel on an investment property is not a creative or emotional process, like a home renovation to your primary residence might be. It’s a strategic process focused on maximizing your return on investment (ROI) by increasing your income, effectively improving your price to rent ratio. So, like most business processes, a rental remodel hinges largely on expertise and efficiency.
First, how can you get real about your costs up front? Unfortunately, many investors overcomplicate it, which can waste time and quickly become overwhelming. Not a good combo for smart decision-making.
Our simplified approach to remodel estimation has been tested by time and experience, helping facilitate smarter investment property purchase decisions on thousands of single-family homes, as well as multi-family properties.
Disclaimer: we provide highly efficient, fixed-rate property management services. We do not provide investment advice. But since all of our property-management clients are, at some level, real-estate investors, we thought it would be helpful to share some information here about how we choose to consider a property’s viability as a profitable rental.
Hint: we like to keep things simple, quick, and honest at the outset.
Time is money, so you must use all of the tools at your disposal to make quick, informed, and confident decisions about your investments. Our approach to assessing the cost of a remodel can help realistically evaluate:
- The current value of a property
- How much it’s going to cost to rehab or renovate it
- What spread exists between the all-in cost and the after repair value (ARV)
Streamlining Your Rental Remodel Evaluation
Although many investment “gurus” may prefer you believe otherwise, we don’t think that estimating the cost of a remodel is rocket science. By simplifying your approach, you can gain the confidence to walk into most any property, take a few minutes to explore and evaluate, and leave with a reasonable take on whether or not it might be wise to make an offer.
To help you get there, you can grab our free 7-point major component checklist here and checkout our quick-take approach to interior rental remodels below:
If you look around a property and can tell immediately that the interior is outdated and needs to be upgraded, just jump ahead and assume a standard $20,000 price tag. (Use $15,000 for a multi-family unit, as they are typically smaller in square footage and have smaller kitchens.)
Some properties will require less, and others a little more. However, using this general guideline for an interior remodel gives you a great general idea of where your total investment will end up. And if you know right away that the up-front cost and likely price-to-rent ratio wouldn’t come close to justifying the spend, this quick assessment tool can save you loads of time and complication.
This approach will address most of the commonly replaced items on the average 1,000 – 1,200 sf house, including:
- New kitchen cabinets
- Granite countertops
- Stainless steel appliances
- 6-panel doors
- Light fixtures
- 3-tone paint
- Basic miscellaneous finish work
This ballpark works great for a property that is generally outdated or in poor condition and in need of a full remodel. If some components are in great shape, you can reduce the cost on a case-by-case basis. (But be careful trying to justify components that are not really in good condition in an attempt to “save” money.)
Major Components: The 7-Point Checklist
If you’ve given the property interior a once-over and it’s still worthwhile to continue assessing the investment, it’s time to examine the major systems and features.
In the spirit of keeping this quick and simple, use this baseline: for each major components that looks like it needs to be replaced or revamped, assign a $7,000 price tag.
We pay the most attention to 7 major components. We list them out and bring a simple checklist along when assessing a potential investment property. For each item, we assign a $7,000 price tag, which gives us a surprisingly reliable estimate of final cost—very quickly, very simply.
You can grab our checklist here:
First-time investors often get overwhelmed with detailed cost analysis. They spend loads of time contemplating whether or not they can save a kitchen cabinet or salvage a front door, when this general guideline would have given them a close enough estimate to assess the investment on the spot.
Save time (aka money) and start simple by keeping your checklist in hand.
Rental Remodel Assessment Formula
Once you’ve completed your quick and concise rental remodel analysis, it’s time to get to work crunching numbers, so you can finalize the decision on whether or not to make an offer.
Disclaimer: We treat the analysis of a property we will hold long term the same way we would if we were intending to sell a property (flip). This forces our numbers to remain conservative, allows us to make an apples-to-apples comparison with other investors who may be evaluating the property, and gives us options should we decide not to hold the property long term for any reason.
In the spirit of above-and-beyond sharing, our formula looks something like this:
- Start with the after-repair value of the home (ARV)
- Subtract an 8% sales cost
- Subtract the rehab cost
- Subtract a $20,000 spread (your profit)
This gives us the maximum price we could pay for the property and still maintain a healthy profit margin. If this number is within 20% of what the home is listed for, we’d consider making an offer at our maximum price, or just under.
If our maximum price is not within 20% of the list price, we wouldn’t spend the time writing the offer. Instead, we’d focus our efforts on finding another opportunity.
It’s that simple.
While the numbers on this strategy have changed a bit over the years—and may fluctuate based on your local real-estate market—the mentality is the same: assessing the value of an investment property remodel doesn’t have to be rocket science.
There are so many variables and unknowns between the initial analysis on the property and completion that there is no way to know going in that you will be 100% accurate on your cost estimate. But after remodeling hundreds of single-family homes and apartment units, we have found that this basic analysis gets us very close to where our total actual costs end up.
With the right knowledge and the right tools, you can quickly get a read on whether or not a potential investment property is likely to align with your financial goals.
A few final reminders:
Don’t let emotion drive you, and don’t confuse your real-estate agent with an investment expert. Look at realistic numbers, not ideal projections. And always consider the up-front rental remodel costs required to achieve a property’s true potential rent.
Know someone who would be interested in rental remodel advice, property management tips, or investment insights? Please share a link to this post or encourage them to subscribe to the Epic newsletter.