Renovations are an essential part of success in single-family real estate investment. You know the drill — buy a property in need of some TLC at a reduced cost, then utilize the services of skilled contractors, inspectors, and tradesmen to get your property in tip-top rental shape.
But what is the real benefit of renovating properties? Why shouldn’t investors just skip the hassle and buy new? Or why not just buy an older home at a lower cost and forgo the renovations altogether?
There are big reasons real estate investors should invest wisely in property renovations. We’re not just talking about flippers, either. This goes for buy-and-hold investors, too.
Why SFR Renovations Make Sense
Increased Rental Rates
Perhaps the most obvious advantage to a property renovation is the fact that you can charge more for rent. The more up-to-date a property is, from new paint and floor to appliances, doors, and windows, the more valuable it is in the eyes of the resident. A renovated property is like new, and you can charge like-new prices. Ultimately, this maximizes your rental income without costing as much as purchasing a brand-new property.
Forced appreciation refers to an increase in a property’s value due to investor action. Properties naturally appreciate over time. This is what a homeowner will typically depend on when considering their personal residence an investment. Down the road, they plan to downsize and sell their long-term family home for a profit. Forced appreciation is something that every investor can and should do. Renovations aren’t the only way to force appreciation, but it is a primary way to do so.
Renovations themselves are an investment. Different kinds of renovations carry a higher ROI than others, but ultimately, the goal is to level-up the value of the property in a short period of time versus waiting for natural appreciation. Buy-and-hold investors benefit from passive income, forced appreciation, and natural appreciation.
Flippers, by contrast, only truly benefit from forced appreciation.
Regardless, the idea is that your property is worth more than you paid for it by merit of its renovations. If you’re strategic, the money you put into your renovations will cause that amount…and more…to be added to your property value.
Environmental Impact & Energy Efficiency
More and more, governments on the federal, state, and local levels are offering incentives to owners who invest in energy efficiency and renewable energy. These incentives include tax credits and rebates, among others. Real estate investors are usually buying older homes in desperate need of these modern upgrades. Not only do you make the home safer and more livable, but you save on monthly energy costs on top of government incentives.
Resident Attraction & Retention
Rental residents, just like homeowners, want to enjoy being where they live. They want homes that are comfortable, convenient, and aesthetically pleasing. You’ll find that the people most eager to move on from their current rentals are those dealing with aging appliances, dirty conditions, and outdated details. When real estate investors invest in a modern facelift, they can appeal to the aesthetic sensibilities of their residents.
Residents want to feel as though they’re living in a real home, not in a temporary compromise. When real estate investors make this happen through intentional, thoughtful renovations, they are better able to attract and retain quality residents.
Reduced Maintenance Demands
While renovations can be a hassle and a half, they are well worth it. Part of what makes renovating from the beginning so worthwhile is that you drastically cut down on the need for maintenance and repairs. You shouldn’t have to patch up a brand-new roof or fix a just-installed dishwasher. The more you invest in quality renovations, appliances, and details, the better off you’ll be in the long-term. Save yourself the headache of constant maintenance demands and renovate and replace before you “need” to.
There are two different tax classifications used for renovations: repairs or capital expenditures. Repairs fall in line with your other expenses and can be written off on your taxes to reduce your liability in the year they were completed. Capital expenditures, however, are not considered expenses. They improve the value of your property over the long-term and thus can only be written off over time through depreciation.
What’s the difference? A repair would be replacing an existing door or window that is broken. Capital expenditure would be a new HVAC or roof. If you’re unsure of what category your maintenance and renovations fall into, consult a tax professional with experience in real estate investment.
You can avoid the headache of renovating a property while still reaping its rewards: go turnkey with REI Nation!