The Cost Benefit Analysis of Fixing Up Your House Before Selling – Case #2 The Rental House

Rental Real Estate - Needs Kitchen Remodel This is our 2nd case study looking at potential issues with a house and if it is worth fixing these issues before trying to sell.  The basis for the analysis is the Remodeling 2014 Cost vs. Value Report, which is a report put out each year by Hanley Wood to look at the Cost vs. Value of a variety of home improvement projects.  In this article we’ll be looking to see what the average costs of these home improvements for a house that is in “rough” shape and what home values these repairs might bring. The Cost vs. Value report is broken down by region and since we are interested in Eastern Massachusetts and Southern New Hampshire we will look at the “Boston” area report.  This region happens to be defined as the almost exact area of interest noted (Specifically it is for Bristol, Plymouth, Norfolk, Suffolk, Middlesex and Essex counties in Massachusetts and Hillsborough and Strafford counties in New Hampshire). In this fictitious case study we will examine a house in need of substantial home improvements in order to make it ready for the retail market.  The conclusions drawn here is most likely be different than if the house was in pretty good shape and market ready, but the sellers want to try to maximize the home value and sell it faster.

Case #2:  The Neglected Rental House

This is a pretty common type of property.  Maybe the owner bought it as an investment but has grown weary of the grind involved with managing the place.  Or maybe they never wanted to be a landlord but got caught in the market crash and had to rent it since they could now sell it for what they owed.  They could also have become an “accidental landlord” for other reason as well. What often happens in these cases is that the new landlord has very little incentive to do many home improvements, repairs and upgrades that will modernize the house even if it means pulling in top rental rates and improving the home’s value.  Say one spends $12,000 on various cosmetic home improvement items (as in nothing that safety or basic habitability of the house) but would allow them to get an extra $100/month in rent.  Well one does not need to be a Math Wiz to see it will take 10 full years just to get that home improvement investment back with the high rents.  The real kicker there is that in 10 years those home improvements will be old and dated again and not command the higher rates!  For this type of reason many rentals have very old and dated features since changing them has little to do with keeping the place clean, safe and generally functional.  I am working on the assumption that the owner DOES take those things seriously and is not a slum lord. Okay first let’s define what criteria to use as the mindset when deciding what renovations to do.  We will use the same as our previous case study on the “We Love the 80’s!” house, which is to appeal to modern buyers and will allow the sellers to get close to the best home value in a reasonable amount of time (which we will say is less than 60 days on market or 90-110 days from original listing until closing the sale).  For this type of house we will do a minor kitchen remodel, a bathroom renovation (Assuming a 1 bathroom house), replace or refinish all the flooring, replacing the old siding with new vinyl siding, total window replacement and 2 new exterior doors.

The Kitchen Remodel:

They always say that the kitchen is one of the most important rooms to sell a house, and that saying does seem to ring true.  If you have a very dated of very cheap rental level kitchen then you will be able to sell your house even close to average home values for other similar homes in your area.  For this case we are doing what the report has defined as a major kitchen remodel.  While in some cases you will keep the existing cabinets and just refurbish them often in a long term rental besides being dated the cabinets can be in very poor condition, additionally we will remove the old counters with a new “granite style” laminate, replacing all appliances with low/medium grade new ones (For the quoted pricing you should be able to get stainless steel) and remove the linoleum or vinyl and put down low end ceramic tile flooring and add decent quality fixtures throughout.   The average cost for this type of kitchen design is $64,078 and you get back on average $53,319, or about 83.2%.

The Bathroom Renovation:

Aside from the kitchen the bathrooms are the next place it is generally agreed upon as the best place to spend on home improvement upgrades to sell your house.  Same as the kitchen, few buyers want to pay retail price for a place with a cheap outdated bathroom.  Since the space is small and since we are assuming low end and old fixtures we will assume a full gut for the bathroom renovation.  What will go back in isn’t going to be fancy but the bathroom ideas here will include a new tub with modest tile surround, a modern vanity with solid surface counter, new medicine cabinet and toilet, fresh paint and tile floor probably the same as the kitchen design to save on some material costs.  Average cost for this home improvement project is $19,980 and you recoup about $14,219 or 71.2%.

Exterior Maintenance:

We are going to lump the siding, windows and doors in this one category of home improvement projects.  We’ll talk about each separately and the project costs for each from the report, but for the sake of space won’t give each its own section.  While exterior maintenance and curb appeal are very important and can cause buyers to not even go into the house to see your new expensive kitchen design and bathroom ideas, it is something that is very common to be neglected in rental houses and can really affect the home values. Let’s assume that it is old clapboard siding with a fair amount of damaged pieces and chipped and peeling paint throughout.  It isn’t in such bad shape that major repairs are needed for safety or structural reasons but it is in bad enough shape that it will be much harder to scrape and paint then to do vinyl siding over it after any basic maintenance is done.  We will assume basic vinyl siding and not higher end materials that can increase the cost.  The average cost for this home improvement project is $13,231 and you should be able to get back $12,461, or about 94.2%.  Not that this is for 1250sqft of vinyl siding, if you have more of less the numbers will shift. The windows are old but not falling apart.  Single pane and wood, not energy efficient and not what anyone will want to see if a house that they are looking to buy at full home value.  All the existing windows will be replaced with typical vinyl replacement windows.  Window replacement is fairly simple so not much more detail here.  The average cost for this home improvement job is $11,439 and you will be able to get back $9,795, or about 85.6%.  Similar to above this is for replacing 10 standard windows.  If you have more or less, or odd sized ones, it will shift the cost. Finally we will replace the front and side door since they will likely be dinged up and faded at best.  They may still be structurally fine, but will look that much worse with the window replacement and new vinyl siding.  This is also a relatively inexpensive home improvement project so it needs to be done with the rest of the exterior renovation work.  The average cost is $1,294 but since there will be 2 replaced we will just assume we will double it.  So total costs here will be $2,588 and the doubled amount expected to get back is $2,400 or 92.8%. Our exterior renovation work has cost a total of $27,258 of which we expect to recoup $24,656 which is 90.5%.

Other Home Improvement Repairs:

The Cost vs. Value report only covers a limited number of home improvement projects so many minor things are not included.  Among these things are new flooring and painting, which are items that will need to be done.  The house we described had redoing the flooring as a major project to be completed, and well you ALWAYS do interior painting if you are trying to improve the home value for resale.  Since we don’t have official data for this section I will assume that you get 100% of your costs back. Some of these home improvement projects you might actually get a little more than you pay (Like painting) but others you might get far less, so we will just assume you just back your investment on it all to be conservative.

Flooring Replacement:

Let’s assume a 3 bed room house and we will put carpet in those bedrooms.  We will assume there is hardwood in the living room and other areas (other than the kitchen design and bathroom designs, where the flooring is included in those home improvement costs) and is in good enough shape they can be sanded and refinished.  For the carpet we will assume something like 550sqft of carpet which we can say will run about $1,800 for that job.  For the hardwood if you find a good person and they aren’t in bad shape $3.50/sqft if a safe guess and let’s say there is 700sqft for a total of $2,450.  That gives us a total cost for new flooring of $4,250

Painting:

As alluded to in the intro of this section you can’t do all this other work and have old paint on the rest of the house.  The kitchen and bathroom will be painted as part of their renovations already so that only makes not painting the rest of the house that much more obvious.  Since those two rooms have that included in their costs I’ll say you can probably spend as little as $2,000 if we assume that the existing sheetrock needs minimal repairs and prep to be painted.

What DIDN’T We Do?:

So you did a lot of work to your house to increase the home value!  However there are several other home improvement projects that were not done that are worth mentioning. One major item we did not do on the outside was the roof.  We will assume that there are no issues with the roof and while it is older it still can have a few years left in its useful life expectancy.  A savvy buyer will discount for this, but many will not worry as long as it has some life in it. Similarly we did not touch the boiler.  The current one is old but not old enough that failure is imminent.  It is in the 15 year old range.  This won’t be a selling point to a buyer, but if it is working properly you can probably get away without doing anything to it as it should have a good 5-10 years left on its life.  However I would seriously consider spending a couple hundred bucks to have it serviced to show it is working as expected. None of the plumbing or electrical (Beyond want was needed in the new kitchen remodel and bathroom design) were touched.  Assuming they were updated at some point we will try to let those ride.  However with the amount of work that is being down the inspectors would likely demand that those items are brought up to code if they are not.  This could cost several thousand dollars each if that were the case.

Final Costs vs. Rewards:

For all the home improvement work described here the expected bill for it all is a staggering $117,566 with an expected return of $98,444.  This is only an 83.7% return on that investment.  Hopefully another benefit will be that the house will sell much faster at the appropriate price point. Being able to sell faster is a benefit past the direct monetary considerations, but what are the drawbacks.  One thing is since it was a rental unit it will be vacant for at least a couple months during the work. Then once it is done if your goal is to sell to an owner occupant you probably aren’t going to get new tenants which will bring your holding costs up even more.  Best case with a quick retail sale that doesn’t have any real issues will still take a minimum of 30 days to close (This would require that there was an offer accepted the first day on market and no hang-ups leading up until the closing, both of these are pretty unlikely).  The biggest of the potential drawbacks is… What if you don’t have $117K to do the home improvement work???? If you don’t and you put it on the market you will have to discount the home value by possibly more than the $98K of home improvement value you would have added.  Most retail buyers won’t even consider a place that needs that much work.  Even those looking for a fixer upper will want to get a place for at the most the value after the repairs less those cost to do them so you will likely need to discount the home value more like $110-120K to start and hope someone likes the location or the “bones” of the building.  Most likely you will have to drop the price and/or wait several months to be able to sell it. While selling to an investor is not right for everyone one, someone with rental house with a lot of deferred maintenance is a very good candidate for it.  Do you have a dated house that needs a lot of home improvement work to appeal to retail buyers?  If you want to sell your house fast and hassle free in its current condition hit the “Schedule a Consultation!” button on the top right of this page to get more information.  

 

 

* © 2014 Hanley Wood, LLC. Complete data from the Remodeling 2014 Cost vs. Value Report can be downloaded free at www.costvsvalue.com    

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