807: How to Make the Right Improvements
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00:01
Welcome to Episode Seven of Season Eight of the Growing Empire Show. Today we're going to talk about how to make the right improvements to your investment property. So stay tuned.
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Welcome to Growing Empires. Hosted by real estate entrepreneur and trusted investment advisor Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
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Before we jump into today's episode of the Growing Empires podcast, I have a program update for you as we are shifting this podcast from a weekly to a bi weekly show starting with season nine. I launched this podcast in July of 2020 right in the middle of the pandemic, the real estate investment market was quite different back then versus how it is today and how I expect it to evolve over the next few years. I will continue to make sure that each podcast episode focuses on new ways to help you optimize your real estate investment portfolio as an active investor, and I'm adding a new way for you to get the best information about investing in real estate for passive income. Combined with this Growing Empires Podcast and my Growing Empires Advisor Guide newsletter, I'm launching the Empire Investment Club. Which is specifically designed for people who want to earn passive income from real estate. I'll be sharing more about our new Empire Investment Club. So make sure you're signed up for the Growing Empires Advisor Guide newsletter by visiting my website, JenniferdeJesus.com. Finally, I want to thank you for listening, whether it's your first time or you've been a loyal listener for a long time, I'm looking forward to continuing to bring you the very best expert interviews, information and education to help you grow your real estate Empire.
01:40
How to make the right improvements? Well, making the right improvements to your investment properties, a combination of financial analysis and knowing what's going to get you the highest rent and value when you go to sell your property as well as bring you the highest rent for your occupancy during your whole period. So let's start by talking about the difference between improvements, you have capital improvements and you have cosmetic improvements. And those two are quite different in how they involve tenants as well as how they involve the value of your overall building. So capital improvements are things like roof, windows, heating systems, and they're typically higher expenses. And those things may not have a direct impact on your tenant, although they could. If you've got an old heating system or old windows that are causing a draft or the heating system keeps going out every winter. You know, that could cause an unnecessary environment for your tenant, which is not going to help you keep happy tenants. But things like the roof, unless the roof is leaking into the units, you know, making the choice to have a capital improvement to replace the roof likely will not have any impact in your tenant. So how do you make those decisions? I think it's important to understand that improvements that you're making, especially if we're talking about capital improvements, are things that you've got to make sure that you're doing and that they make sense for the amount of time that you intend to hold the building. If you're only intending to hold the building for a year or two, you probably don't want to replace the roof. But understand this, that when you go to buy a building or when you go to sell a building, just like you look at all of these things that could be wrong with your building and could potentially be costly to you, a new investor is going to look at your building in the same manner. If you replace the roof, or you do other capital improvements, in theory, the value of your property is going to increase by the amount or more than the capital improvement that you put in. Cosmetic improvements are very different in that sense, and that they're not really dollar for dollar improvement value. But they could impact the rental income that you get on your unit. So when we're talking about capital improvements, we've got to look at a couple of things. One is are you going to make your money back before you sell the property? So depending on what your hold time is, will you make that money back? If the answer is yes, then you should consider doing the capital improvement. Because every dollar that you spend on capital improvements will be dollars that you make up when you go to sell the building. But you also want to make sure that your building is going to cash flow. Even with the respect of this capital improvement. You don't want to typically get involved in pulling cash from your other properties, or from your other savings accounts to improve buildings. When you bought the building, you should have had a reserve account specifically for this building that was part of the money that you dedicated to this building to do improvements as they came up. You have to look at what the value is of that reserve account and determine whether or not making these improvements down makes sense or would that money be better spent in those cosmetic improvements. But generally the rule of thumb is if you can make up your capital improvement expenses before you sell the building, and if it's going to have dollar for dollar impact on your sell-ability or sale price of the building once you go to sell it it's a generally a wise investment. And also keep in mind that these things have a lot of impact on the overall health of your building. So if you have a leaky roof and it's leaking into other portions of your building, you're having other damage that you wouldn't otherwise have, if you would just fix the roof. If you got windows that are drafty, you could be causing pipe breaks in the wintertime in your investment property. And that's going to cause water damage, significant water damage, and that's going to be very costly as well. So sometimes just putting the bill for the capital improvements upfront just makes sense, because the cost of the damage that could be done to your building in the event of you not doing the capital improvement is much more costly.
05:32
Now, let's switch this topic to cosmetic improvements. I am not in general, an advocate of doing cosmetic improvements to a unit while a tenant is in the unit. Now it's one thing if the tenant has been with you for 10 or 15 years, and they are paying market rates. Okay, that's a really key factor here, they're paying market rate. And you want to keep them happy and they want the carpets replaced. So maybe you want to just replace the carpets that I don't necessarily have a problem with. But if you know that the tenant is not paying market rate, and you know that the tenant is likely to move, I would not generally try to do any kind of cosmetic improvement while the tenant is there for the simple fact that they could damage whatever improvement you make. And then you could have to make that same improvement again. So generally, I don't think that that's the wisest choice. But let's talk about the tenant is moving out. And now you have an opportunity to get what was a low paid rent up to market rates, and let's assume that they're considerably different. First, you have to know what the market is going to allow you to get for that rental market. And you know, since the pandemic, since the amount of inventory has decreased and the demand has increased, you will find that from the rental perspective, people are paying a lot more today than they would have done years ago. And for that, it gives you a lot more room to improve the properties to a level that makes sense. Because you're going to get that money back in the rent.
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The episode will continue in just a moment.
07:02
If you're like me, you know the importance of diversifying your investment portfolio. Real Estate Investments, whether you're an active or passive investor are a great way to add variety and reduce risk to your overall portfolio. But what about stabilizing that portfolio? If your portfolio is diversified through real estate, you still have to stabilize your properties with the right tenancy know when and exactly what capital improvements to do. And assess your entire property's portfolio to maximize property values and their income potential year over year. Yes, it's a lot. And you'll need help to make sure you're looking at everything as objectively and strategically as possible. Get the guidance you need to assess and make the right decisions that will stabilize and optimize your property so their longevity is assured. Book a call with me and I'll guide you through the process and answer your questions. Go to growingempires.com and click on book a consult. And you'll be on your way to a healthier, more stabilized and diversified portfolio with real estate.
08:00
If you're not familiar with what market rates are or what you should be getting for your unit, I highly suggest that you hire a seasoned professional that can help you analyze what market rates are for your units. In addition to that, you also need to understand what is cosmetically acceptable for the marketplace that you're in. For the area that you're in, for the type of tenancy class that you're in, and for the building as a whole and the environment that it's in what makes sense. And what I mean by that is, you know, if you're in a B or C class neighborhood, I wouldn't expect to see granite countertops or something of that nature, I would not expect to necessarily see hardwood floors. I would expect to see more of like a vinyl plank, carpet, you know those different types of things. I would not expect to see granite and stainless steel. Now if I was in an A class area or an A class building with amenities, I would expect to see granite and hardwood floors and things of that nature. So you've got to make sure that whatever the improvement that you are going to make first makes sense for the area and class of building that you're in, the area and class of tenancy that you're in. And you want to make sure that the cost of that improvement is not going to outweigh the jump in rent that you're going to get. Because if you're doing that, then the choice that you're making is not the best financial choice. And how you analyze those details is simply this. What is the current rent that you're getting versus the rent that you're going to get at market rate. Let's just say for the sake of you know, argument here, we're talking $400. You're going to jump around $400 from the current rate to the new market rate. That's pretty sizable, right? So $400 times 12 months, that's $4800 in additional income that you would make if you're able to do that. A general rule of thumb is cosmetic improvements, you should be able to see your return on that investment inside the same year. Capital improvements are usually two to two and a half years you'd like to see your return on investment. Cosmetic improvements you need to do it in the same year for the simple fact that if I make this improvement, and all the rent that I'm going to get, I'm not going to make a penny on for the next year. Is it really worth that improvement? And the answer is probably not. So you want to make sure that you have a pretty quick turnaround on making that money back for that cosmetic improvement. The other thing that you're going to want to think about is how does this match up in conjunction with the other marketplace rentals that are available. Because if you choose not to make capital improvement, and your quality of your finished product is less than stellar in comparison to the rest of the marketplace, it's going to take longer for you to rent. So it's not just about that basic math upfront about how much is your rent increase to how much you're spending. It's also about how long is it going to take you to occupy the property. And when you occupy the property, do you have to take a less than qualified tenant because you're giving them a less than acceptable condition of a unit? All of these things go into play, to telling a story about what the cosmetic improvement adds as far as value to your overall portfolio. A general rule of thumb that I always recommend to investors is make sure that you're improving the unit to the minimum standards of the area. And honestly, if you're trying to get max rate, you're going to want to improve it to better than minimum. So what is acceptable in this marketplace? What condition are you supposed to go to to give them something that is habitable, and something that people look for? Look at what else is on the market. Look at what your competition is. Because that's going to give you a really good indication of whether or not you should make some of the improvements that we're talking about. But make sure that the improvements that you make make sense to the tenant, everybody loves convenience, and will pay more for convenience. So if your question is, should I cap off the water lines and not allow the tenant to add a washer and dryer or should I leave them there and allow the tenant to add a washer and dryer, I would venture to say that my decision would be to leave the water lines there. However, I would make them bring their own laundry equipment. Not necessarily provide it for them, because then I've got something else to maintain. And I would also make sure that I'm giving them an increase to either their rent or a flat fee charge for the water that they're using for that laundry service. But anytime you can add convenience to things, that's going to make the tenants want to stay longer. So convenience equals length of tenancy, for sure. And then the quality of the unit, if you're putting down really cheap materials and things are going to break very easily, well then, your tenants going to be annoyed and then your tenants going to come back to you and ask for repairs. And if you're listening to what I had said earlier, where I don't tend to want to make cosmetic improvements while a tenant is in that unit, if you just put down a low quality floor, it chips now the tenant wants it replaced and now you don't want to do it because the tenants in there, you're going to have conflict with that tenant. And that conflict is going to create another turnover, maybe even before their year mark is up. So it's not something that's a very hard and fast decision, you have to really analyze all the pieces of the puzzle. When you're trying to make capital improvements, as well as cosmetic improvements. You've got to look at the whole picture. If I don't make the capital improvements now, what could the effects be on my building? And, could those effects be more costly than if I just made the improvement in the beginning? When we're talking about cosmetic improvements, you've got to look at how quickly can you get a tenant? How much are they willing to pay for that improvement? How long will they stay because I'm giving them a nice place to live? And what's it going to cost me to make that improvement and can I make that money back inside of a year? And those are all the things that really need to be considered when you're trying to make improvements to your property. Again, my advice is always to make sure that you have a seasoned professional to help you with these decisions. Certainly your property management company should be able to do that for you. But a really great investment broker or somebody that has a really good handle on not only the investment world but also the rental market area would be able to give you some advice in these areas. I hope you got a lot out of today's show and until next time, take care.
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For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio visit growingempires.com