You know that sinking feeling in the pit of your stomach, when you decide to remodel your kitchen …
… and you think it’ll cost $5,000 ….
… and it ends up costing triple your estimate?
Yeah.
Last June, I decided to remodel one of my rental apartments. My tenants were renting the apartment for $750 per month, but it was an ugly space: yellowing 1970’s countertops, pink-and-brown bath tile, and a refrigerator that blocked the bedroom door.
I decided to upgrade the unit: stainless steel appliances, granite countertops, a new bathroom. (In hindsight, I should have realized that a $5,000 ballpark was far too low.)
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
How did these costs pile up? Find out below …
Before
But first, check out the “Before” photos.
See how the refrigerator blocks the bedroom door?
Through the reflection, you can see the yellow plastic surrounding the tub.
The aged bathroom vanity/sink sits atop 1970’s floor tile.
A close-up of the kitchen floor. Yuck!
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
Total: $17,021
… triple the amount that I originally predicted! Yikes! Good thing I’d been stockpiling cash for months leading up to this project. Whew!
One huge caveat:
This figure doesn’t account for the value of my time. My “sweat equity” includes:
- Installing the countertop, cabinet hardware, closet doors and ceiling fans
- Managing the project (defining a scope of work, selecting contractors, overseeing progress)
- Driving all over town for wholesale materials and scratch-and-dent appliances
- 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.
At any rate, suffice to say that remodeling an apartment (or any property) is a lot of work upfront, for the benefit of getting steady payments in the future. Real estate investing creates a stream of passive income after you repair and maintain the space, hire a property manager, and automate your systems.
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 …
French doors and huge windows shine sunlight on the newly-refinished pine floors.
Stainless steel appliances match the sleek new cabinet hardware. Granite countertop meets neutral-toned tile backsplash.
Here’s a brand-new bathtub surrounded by subway-style tile …
… plus oil-rubbed bronze bath fixtures.
Includes a luxury shower head.
Here’s the bathroom vanity and sink ….
… complete with a waterfall faucet.
History meets modernity: an original 1912 fireplace in the freshly-painted, newly-carpeted bedroom.
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. 🙂
Update 2013: I raised the rent by an extra $100, so that the space now rents for $1,150 in total. It still filled within a day or two of posting it on Craigslist (which makes me think that I’m still pricing it too low.)
Update 2015: I raised the rent by another $300, plus a $40 per month pet fee, so it rents for $1,490 in total. To avoid pricing it too low, I started advertising the rent at a rate that I suspected would be far too high — $1,750 — and gradually decreased the price until it reached the point where I’m getting an average of 5-10 inquiries from tenant prospects per day. We knew we found support at the $1,450 price point because that’s when the phone calls and emails from prospects started flooding in, rather than trickling in.
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 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 double the initial investment in 8 years. That’s the equivalent of making a 9 percent return in the stock market.
Update 2015:Â So … I’ve doubled the rent. In 2010, this space rented for $750 per month. In 2015, it rents for $1,490 per month.
This is partly due to massive home improvements. I wrote this blog post in 2012, after putting $17,000 into the unit. Between 2013 – 2015, I put another $5,000 into upgrading the windows, building a new deck, and creating a new flagstone walkway for this rental unit. I also put an additional $15,000 into general exterior maintenance (for the whole building), which we can average into $5,000 per unit. We installed new landscaping, gutters, fence, security lights and more.
In short, I’ve made about $30,000 in improvements to this unit in the past three years. (I’ve invested around $160,000 into improvements into the building as a whole — about $110,000 into Unit #1, $30,000 into Unit #2, and $20,000 into Unit #3 — over the past five years).
That said, however, not all of the rental increase can be attributed to improvements alone. Housing prices have doubled in the past five years; rental prices should logically mirror that.
If homebuyers are paying double, it makes sense that renters would pay the same, as well. The Cap Rate — which is measured based on current market value — stays the same.
Conclusion? It’s a solid investment with solid returns. Renovations are a serious job, but once they’re done, you can kick back and enjoy a steady stream of passive income for years to come. Work hard today so you can relax later.
The apartment now takes minimal time and energy. The tenants get the joy of living in a beautiful, upgraded space at a price that’s reasonable for this neighborhood. That’s an incredible win-win.
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Interesting project and conclusion! I like the faucet, too!
Could you have raised the rent price after generating so much interest, or is that considered unethical? The reason I’m wondering is I’ve heard of bidding wars for houses that go above the asking price so this would seem to be a similar scenario, no?
@Jeffrey — If I hadn’t accepted the first guy’s deposit, then yes, I could have re-posted the ad with a higher rent. But he was willing to give me a deposit on the spot, so I said yes. I figured a “bird in the hand is worth two in the bush,” as the saying goes.
Got it – and I love that saying!
I am starting a huge remodel fully renovating a 4 unit multi family complex, I am very nervous and need some help and pointers on where to begin and what kind of material to use since ther are going to be rented out.
Hopefully I can get this done?
ethan,
PLEASE keep us posted on whats going on with your 4 unit multi. i will purchasing one myself this summer. i’m trying to connect with someone who is going through what i ma about to experience.
Put in high quality Armstrong or better commercial linoleum. It wears so much better than cheesy Home Depot quality linoleum, and install prices are not much different. In general, when outfitting a rental apartment, I would tend to use higher-quality finish-out. I’d also make sure to use speckled material for countertops, carpets, etc. because those types of materials disguise stains. I would not use tile in bathrooms because I think tenants are not as responsible as owners in controlling moisture. I would use a kerdi/schluter system for waterproofing (or a one-piece fiberglass unit if there are no pesky windows in the tub/shower enclosure), and I’d use one-piece Kohler-type panels in place of tiles. Saves a lot of maintenance grouting, better control of molds, etc. As a rule of thumb, I’d save the more beautiful finishes for areas where abuse is less likely (backsplashes, crown moldings, window trim-out), and I’d put easily replaceable finish-out where abuse is likely.
Nice looking remodel Paula!
That is some BIG BUCKS though. What is $17,000 as a percentage of the total value of the house?
The most I spent was about $6,500 on remodeling a bathroom. I really don’t want to spend any more if I don’t have to. But the time is probably coming.
@Financial Sam — I bought the house for $225,000, although last year it appraised for $350,000. (Check out that post, My House Shot Up $100,000 in Value in One Year) So depending on which figure you use, it’s either 7.5 percent or 4.8 percent of the total value of the house. (Note: The house is a triplex, which is a building with three units. The purchase price covers all three units, not just this one particular unit that’s the subject of this post.)
I imagine that when all is said and done, I’ll be putting about $50,000 – $60,000 into this house. I snagged a cheap purchase price because the house has so much “deferred maintenance” (to put it kindly).
I probably would have put cheaper furnishings in but if the price will support luxury it is definitely an option to consider. Glad it worked out even though it went WAY over budget.
@Lance – The fixtures are the part that sell the place. Why spend $16,500 on repairs and skimp on the final $500? That’s the part that wins the customers.
Paula! That looks INCREDIBLE!
You are absolutely right about the repairs and skimping, there is an expression, “Penny wise and pound foolish.” You will most definitely recoup the money in no time at all. Good job!
@Chante — I like that expression! That’s precisely why I always put in high-end details like awesome light fixtures, faucets, etc. It’s such a small fraction of the overall cost, and it makes such a HUGE impression.
Remodels can get pricey, that’s for sure! This looks great though, and I like your plan to increase the rent after a year.
That’s a great way to look at it, plus if you do have to re-do the renovations in eight years, you’ll have a better expectation of the costs. I also like the calculations showing that this will end up being profitable. Good work.
@MoneyBeagle — Thanks! It’ll definitely be profitable … the only question is, by how much? 🙂 Some of the renovations, like moving the location of the bedroom door, will last permanently (I won’t have to re-do it in 8 years). But some renovations that I didn’t do this time might be needed in 8 years (the cabinets will probably be worn out by then).
Something that nice would rent for $1,200 – $1,400 here in eastern New Mexico depending on location. Very nice! Hope you realize that profit in the years to come!
@Chris — Hmmm, maybe I should price it in that range and see if there are any takers … $1,400 sounds a bit high for Atlanta, but I wonder if I could at least get $1,200 ….
Wow! The unit turned out beautiful!
@Tisha — Awww, thank you!
Gorgeous renos. That’s a chunk of money but surely it commands a premium rent — and accordingly good tenants.
@Joe — Exactly, you hit the nail on the head! The higher quality the space, the higher quality the tenant. And a good tenant is worth his weight in gold.
Lookin’ good! I know exactly how you felt when all of those hidden issues were uncovered, it’s happened to me on every phase of my house’s remodel. Yours turned out way better than mine in the end though, very nice work.
@Kurt — Through this experience, I’ve learned to inflate repair estimates by at least $5,000 to account for unknowns … especially with such an old house.
Paula, it looks awesome! Well done! I’m curious, did you relocate the door to the bedroom to the other side of the fireplace? You don’t have any photos pointing that way, but I see what I think is the corner of a cabinet or perhaps the fireplace mantel? Is the kitchen L shaped now? That would make more sense, not knowing what the bedroom looks like.
@Anne — I did move the door, and as I was putting photos on the post, I realized I didn’t take any pictures of the new door location. (The corner that you see is a fireplace mantle, and I was standing IN the new doorway when I took that shot). The next time I need to go in there to do a repair, I’ll take a pic of the new door location.
Wow! You did an awesome job renovating. I love old houses and miss that where I live (west coast doesn’t have near as many “vintage/antique” homes), of course old houses require a lot of love, sweat, and elbow grease. The price of your rental could probably be bumped up a bit based on these gorgeous photos of the interior. I’m sure you could bump up the price when the lease expires. Good luck!
Paula, I love the renovations! I can’t believe how incredible it all looks. Even though you put a lot more money into this than you were anticipating, it sounds like it will be easy to rent out in the future. Also, I love that you’re creating checklists of different processes and procedures. So smart! I would love to get my hands on those at some point and I’m sure others would find them incredibly valuable as well. You should consider creating a workbook for DIY Property Mangers.
Ouch! But it looks fantastic. Do you have a pic of the new bedroom door placement?
I like the idea of making the place nicer to get a higer quality of tenants. If it starts out bad, they won’t make an effort to keep it nice. That type of remodel would be way too much for our area, but I think it’s great for Atlanta.
Reno looks sweet!! am wondering how you would avoid underpricing a rental in the future?? starting with a higher price in the ads and going down.. but then how high?? or getting a realtor to give some numbers??
I’ve heard people use 1-2 year rental income as a general rule of thumb in how much should put into a total unit remodel.. so looks good on all accounts!
@30k — I hadn’t heard that rule of thumb before, but I’ll keep it in mind. I assume that refers to a unit that’s already “habitable” but needs a cosmetic makeover (as this unit was).
As far as how to avoid underpricing … I search ads on Craigslist as though I’m a potential renter who is interested in a one-bedroom in my particular neighborhood. Then I see the prices and quality of the rental units available.
In this area, most of the units that are THIS nice (stainless steel, granite) are more expensive, but they’re also in high-rise buildings which include a community gym, swimming pool and other amenities. etc. In this area, many of the units in multi-unit houses (without a gym/pool) are also not as nice … so it was tough to find a strong comparison.
Gorgeous. I love the bathroom tiles and the kitchen drawer pulls (plus everything else). I’d move in, your renter is quite lucky!! And clearly the pain in the neck work will pay off.
Congratulations! I love the renovations…. and so is the waterfall faucet! Renovations can really go beyond your budget. Although it was too late to realize that you prized it too low, at the very least, you were able to start paying off the expenses made from the renovations immediately. Furthermore, you can raise the rent next year.
Good job on this Paula, and the renovations look great!
“But I underestimated the extent of the repairs needed.”
I think this is very common with every project, either wishful thinking, or minimal past experience doing something. This leads to your second point….
“I’m documenting my tasks so that I’ll have a “checklist” when I renovate the next unit”
Great idea. Having done this once, should really give you a benchmark for future renovations and market value of rents you can realistically charge.
@Jeff — Experience plays a huge role in being able to estimate costs. Renovating House #2 was a HUGE learning curve.
I see I am getting late on this one but anyway here is what I am asking: would you have gotten the same rent on a cheaper rehab?
What if you had used white appliances instead of stainless and chrome fixtures instead of oil rubbed bronze? I know the bulk of the rehab was labor but my point is the 80/20 rule…
As nice as the finished product looks aren’t you concerned it might be “too nice” for a rental? Obviously with the speed you got it rented you made some right choices. But now you have got to be concerned with the tenant keeping it looking this nice.
On the other hand it seems like you are developing the right eye and contractor relations to go into more serious rehabbing…wink, wink 🙂
@Luis — Excellent question. I think that the level of finishes is appropriate for a rental in Midtown, walking distance to Piedmont Park. I wouldn’t put this level of quality in most other locations, but Midtown and Buckhead attract a special set of “luxury” renters. (Luis, I know you live in Atlanta, but as a note to the other people reading this comment — I’m referencing specific neighborhoods in our city.)
The other advantage is that I can offer this as a short-term “corporate” rental to businesspeople who are making brief (1-3 month) stays in Atlanta. That subset often looks for accommodation in Midtown, and landlords can charge a much higher rent to compensate for the high turnover.
As for more serious rehabbing … I spend all day looking for deals, and I just can’t find any! All the good deals are gone!
The place looks amazing and the comparison is great. When it comes to the luxury of other peoples money I am an optimist and I would say that the 17k figure will be way higher than what you will have to pay in 8 years. You found/fixed issues that were well over 8 year old issues so unless there is more of the place you did not dig into I would say that your figure would be closer to your original estimate.
@Adam — Thanks! I hope you’re right. I certainly did attack issues that were more than 8 years old, but I estimate that new issues that I haven’t addressed yet will crop up in eight years. (For example: the kitchen cabinets are old. I’ve “dressed them up” with new hardware, but the wood itself will probably rot and sag over the next few years, and will eventually need to be replaced … ) But I like the optimism and I certainly hope these improvements last for a long time.
It looks like you made a bunch of great improvements. I recently remodeled a bathroom of mine and it looks nothing like what you did. It just shows how being smart will really pay off in the end. Great job, I just hope my rental will stay vacant for a long time.
Pam
I’m new to visiting your blog, but I read an old post saying you believed in the 1% rule. What made you purchase this if you’re getting such low rent?
@Stephanie – I’m not sure I understand your question. All of my properties exceed the 1 percent rule, some quite substantially. This property is no exception. What gave you the impression that it doesn’t?
Stephanie, this is one unit in a triplex (a 3-unit building). The purchase price she mentioned earlier was for the whole building, not just this one unit. I don’t think those details were made clear in the post or earlier comments, so your confusion is understandable. 🙂
@Rich — Thank you! I didn’t realize that was the source of confusion.
After you left that comment, I re-read the post twice to figure out where I listed the purchase price. I couldn’t find it anywhere.
Then I realized I had written the purchase price here in the comments section, in response to a readers’ question.
I edited my comment to clarify that the purchase price is for the whole building, not just the one unit. Hope that helps.
Thanks again!
I must say you have a great taste in your remodeling of this project. They are always fun to have a vision like a blank canvas and turn it into a gem as you have. Thanks for sharing.
Ok… I am reading your blog from front to back. Call it my OCD side. Really like the site.
I think you did a fantastic job with the rehab. one question though, is there a reason you opted for carpeting in the living room vs some sort of hardwoods or laminate flooring?
-George
Thank you George! We opted for carpet in the living room because that space used to be a front porch, which later (before we bought the property) became enclosed as a living room. As a result, this room doesn’t have the same level of insulation as the rest of the house, which means it gets significantly colder during the winter. The carpet and padding adds insulation and helps the temperatures in the unit feel more “even”. (Adding more heating air vents in this room would also help solve the problem, but that’s a more expensive solution.)
I’m curious – how could you afford to invest so much money into renovating the buildings after buying them. I don’t necessarily mean the 17k. More-so the $160,000 you’ve invested into the building as a whole. Was this money you had saved? Or did it come from some other source? I hope this is not too personal a question!
@Myra — The renovation money came from a combination of personal savings and also taking out a loan against our rising equity within the triplex. The personal savings accumulated over the span of 3 years, during which time we saved between roughly 50-77 percent of our income. The equity loan was also essential in helping us close that gap.