Now for the post you’ve all been waiting for … what’s the latest scoop on my passive income
As you recall, in June 2012 I decided to remodel one of my rental units. It had been renting for $750 per month, but it was in ugly condition: yellowing 1970′s countertops, pink-and-brown bath tile, and a refrigerator that blocked the bedroom door.
I thought I’d do a cosmetic remodel (granite counter top, stainless steel appliances, complete bathroom overhaul).
I figured the project would cost about $5,500 and I’d increase the rent by $150 – $200 a month … putting more passive income into my pocket!
But I underestimated the extent of the repairs needed. The floor joists were rotten; the plumbing was ancient. The scope of work ballooned, which created four types of costs:
- Labor Costs
- Material Costs
- Permit & Inspection Costs
- Vacancy/Lost Income Cost
What did the total price tag come to? How does that compare to the new rent?
First, check out the “Before” photos.
Here’s how the costs broke down. All items include labor + materials unless otherwise indicated.
Paint – $885
Carpet – $390
Appliances – $940
Cabinet Hardware – $200
Contractors – $6,728 (mostly labor, plus minor reimbursable expenses. Includes about $400 for renting a dumpster.)
Permits – $525
Granite – $910
Tile – $126
Home Depot and Lowe’s – $4,840
Windows – $802
Vacancy – $675
… triple the amount that I originally predicted! Yikes! Good thing I’d been stockpiling cash for months leading up to this project. Whew!
#1: View this number with a plus/minus $600 margin of error. I need to return some of the materials I didn’t use, which will refund a bit of this money. On the other hand, the 100-year-old historic windows need more restoration work, which will add to the cost. I’d say this $17,021 figure is probably “within $600″ of the actual total.
#2: This figure doesn’t account for the value of my time. My “sweat equity” includes:
- Driving all over town for wholesale materials and scratch-and-dent appliances
- Installing the countertop, cabinet hardware, closet doors and ceiling fans
- Managing the project (defining a scope of work, selecting contractors, overseeing progress)
- Advertising the property, taking photos, answering tenant emails
- Bookkeeping and controlling costs
- Due diligence on the tenant applicants, including checking credit scores, changing the house keys, submitting disclosures and performing a move-in inspection.
Total Time Spent: ????
Monetary Value of that Time: ????
Ideally, I should be tracking the time I spend on these projects. I’m not.
I’m documenting my tasks so that I’ll have a “checklist” when I renovate the next unit. I’m developing procedures and processes … hooray! But that comes at the expense of tracking my time. I ought to do both. But my limited mental bandwidth can only handle so much.
Anyway, Oscar Wilde said “a cynic is a man who knows the price of everything but the value of nothing.” So let’s turn our attention away from the costs, and onto the profit …
Dude, I Priced It Too Low!
Before I tell you the price, check out these “After” pictures …
Pretty rockin’, huh? (If I do say so myself!)
I didn’t know how to price the unit. I searched Craigslist ads for similar units, but given the location and quality, a comparable unit was tough to find.
So I listed it for $1,050 a month, figuring I’d wait a few days to see if there’s any interest at that price point.
WHOA DUDE! Within one hour, my Inbox was so jam-packed with responses that I had to take down the ad. One of those respondents called to ask if he could see it within the next twenty minutes.
The unit was still filled with tools, ladders, sawdust, etc., so I told him it’s not ready for a showing. He asked to see it anyway. I relented. He plunked down a deposit that same day.
Total time the unit sat on the market: less than 4 hours. That’s unreal!
(I also have several respondents “on backup” who say they’re ready to move in if the current tenant moves out. One woman even submitted a rental application, paying the $35 application fee, so she could be first in line.)
I’ve never seen that kind of interest, ever. It took me almost three months to find a tenant for House #2. The lesson? I priced that unit waaayyyy too low.
How Good of a Deal Was It?
I spent $17,021 and increased the rent by $300. That means the renovations will require 57 months (almost 5 years) to pay itself off.
Assuming the renovations will last for 8 years before they need to be re-done, the final 3 years of increased rent will be profit. That’s $300 x 36 months = $10,800 in profit on a $17,021 investment. (This is quoted in today’s dollars. I’m assuming rent rises at the same pace as inflation). This is the realistic/worst case scenario.
On the other hand …
If I raise the rent by another $100 a month after next year, the renovations will only require 34 months to pay itself off, which is about 3 years. ($17,021-($300 x 12 months)) / $400 = 33.5 months
This would mean that the last 5 years would be profit. That’s $400 * 60 = $24,000 in profit on a $17,021 investment. After subtracting for vacancies and the added expenses of offering a “luxury” rental (higher maintenance standards, better lawn care, etc.), I’ll probably end up doubling the initial investment over the span of 8 years. That’s the equivalent of making a 9 percent return in the stock market.
Conclusion? It’s a solid investment with solid returns. That said, it’s also a time-suck and a serious job. But if you like making old spaces beautiful, this is an awesome line of work.