Should you just put lipstick on the pig?
As more investors dive into the “distressed” market of buying little houses, they are faced with the question of how much money to sink back into the property before renting it or re-marketing it. There are a number of schools of thought on this, but there are some basic tenets that you can apply to your decision process.
1st – Safety and habitability is crucial. This seems obvious, but many “hands off or out of state” investors don’t ever see the properties they own. Whether it is required by landlord-tenant laws or just good conscience, you need to make sure your property is free of rodents, cock roaches and any other infestation. You should make sure the utilities are on (even if the tenant is supposed to be paying them) and you should make sure the plumbing and toilets are in good working order. In warmer climate states, you should have either an evaporative cooler, window air conditioners or working A/C. You should fix all broken windows and doors and make sure the home can be “secured” by the tenant.
2nd – General maintenance is necessary. This is a broad category, and depending on the age of the home, demographics of the tenant / potential homebuyers, and rent basis you may do more or less. As an example, if you have an older home in an area that has a lot of vacancy, you may want to make sure everything is clean and with a fresh coat of paint, but you may not want to put new cabinets or carpeting in until you have stabilized the property. In addition, you may choose to rent for a year or so and then market the property as a “light fixer upper”. If you bought your property at a “steal”, you probably still have room in the value to upgrade it, but only if you are sure you will get the respect of your tenants in the care of these new items. If you are selling right away, you only want to upgrade what is most noticeable and important to a retail buyer. Many times, new carpet and paint (along with the safety repairs noted above), will attract a potential buyer. However, in this market, it is difficult to make your margin on a “flip”, so it may make sense to plan for lease or sale and upgrade according to the “basic” threshold of the market.
3rd – When to give your “pig” a facelift. There are times, where the lipstick on the pig is not going to work. For example, if you pick up a deal on a home that was left vacant for many months or stripped & damaged by the foreclosed homeowner, you may want to determine the value difference of just replacing the kitchen cabinets with the basic models from Home Depot. You may also need to replace the toilets and fixtures in the bathroom and kitchen have been sitting without use and are beyond repair or cleaning. The one problem with the “facelift” approach is that it can cost you in both time and money, beyond your original estimates. It is more often than not, that once you dig into a wall or pull out some of the old fixtures, you may find unanticipated surprises with water damage, electrical upgrades, etc. This is the time you need to really dig into the numbers. Get a couple of quotes. The first should be the “budget” version, which would include used cabinets, used appliances, but don’t skimp on the electrical and plumbing work. This could really cost you later when the house floods or catches on fire! Second, get a “do it all now” quote with replacement items that fit the house age, style and market. (So, don’t put granite counter tops in a house that is only going to rent for $700!) Once you get your quotes put together, determine how long either approach is going to take. If you are able to earn $1000 per month in rent and the work is going to take 1 month, then subtract two months of rent – one for the proposed schedule and the second month for contingency and marketing time. Then look at the market value of the property with either approach. If the budget approach is going to cost $10,000 and you paid $30,000 for the house, but the market value of the house today is only $35,000, you won’t want to invest any more than that so can recoup your investment if you sell in the next few years. Even if you are going to hold the house as an investment for many years, keep in mind that there may be lots of wear and tear on your investment so it makes sense to phase your “upgrades” to the market and the tenant base.
So, before you break out your wallet, set your expectations to the market and do the math!
