You will rarely buy a piece of property that you can begin renting exactly as it is. Most homes will require some fix-up costs.
Start with a detailed cleaning of the home, including cleaning the carpets (unless you’re replacing them). This shouldn’t cost more than a couple hundred dollars.
Next, do basic cosmetic improvements that make a big difference in the appearance of the home. I only renovate visible items. The main ones are landscape, front door, new paint throughout, appliances, and kitchen and bathrooms (new vanities, countertops, light fixtures, etc.). Repairing invisible items will not add additional value to your property (unless you absolutely have to in order to sell the property).
If you purchase a property in bad shape, you may need to do some deeper remodeling, such as installing new plumbing, electrical, or roof, or changing the layout.
I learned from one funny experience how adding bedrooms can increase your rent. One day a police officer arrived at my home to arrest me for supposedly operating an illegal brothel in one of my rental properties. I said I had no idea this was happening and asked him to follow up with my property management company.
The property managers had failed to screen the tenants. The tenants were, indeed, operating a brothel out of the house. They had gone so far as to add two additional bedrooms by building dividing walls. (Apparently, business was that good for them.)
I evicted the tenants and shut down the operation. What I had originally rented as a two-bedroom house was now four bedrooms, which allowed me to increase the rent by an additional $600 per month. I learned a valuable lesson: You can get more rent if you can add more bedrooms, when possible.
You need to do analysis before you buy the property to determine how much cash you will need to get it ready to rent.
To determine your net cash flow (after you’re paid all expenses and the mortgage payment) you want to have an approximate cost to figure your cash flow break-even point. For example, if you were to put an additional $3,000 into the property and your monthly cash flow is $500, you would break even after six months. Then all the subsequent net cash flow is all yours.
My rule is to never put more than 15% of the purchase price into a property for renovations. One of the common mistakes is to put too much cash in the property and extend your break-even point too far into the future. Investing more may increase the value of your property but when working toward your 5 Day Weekend, your priority is cash flow. Your growing asset is a great side benefit.
On the other hand, it’s not wise to have a slum landlord mentality and put the bare minimum into the property. That results in the lowest rental rates and lower property value.
In my next post, I will explore how you can overcome the hurdle of making that initial down payment on your real estate.
In the meantime, I’d love to hear about your real-estate experiences – and what you learned from them. Thank you for sharing!
Secure your copy of the “5 Day Weekend” book. 5 Day Weekend: Freedom to Make Your Life and Work Rich with Purpose [Nik Halik & Garrett Gunderson]