One of the most consequential errors that new Merced rental property investors make is to over-improve their rental house. It’s sensible to want your rental to be in good condition and to appeal to quality tenants. But improving the property too much can diminish or even kill any profits you hope to make while you recoup your remodeling costs. One of the best ways to avoid this mistake is to think strategically and address obstacles to profitability upfront – before you even buy the property, if attainable. When you begin with your end goal in clear view, you will be less likely to find yourself in a financially shaky situation from over-improving.
Most experts advise starting by planning the end of your investment’s life – your exit strategy. When you purchase an investment property, you need to feel confident that you will be able to refinance or sell the property at a given point in time and make a tidy profit. Otherwise, what is the point of buying in the first place? So as you’re crunching the initial numbers, think about what you will need to get out of your property for many years down the road – including any improvements you have planned. Talk to a few lenders to learn about mortgage products, costs, and whether your goals align with your financials. A good lender should be able to describe what barriers you may face and whether your strategy is solid or not.
Another important piece of information you need to avoid over-improving your Merced rental property is your After Repaired Value (ARV). To guarantee that your investment is profitable, you need to know what the house will be worth once you finish improvements. Applying this figure, you can then be sure that you will not be too big with your remodeling plans. Using good comparable properties, calculate your ARV. Then, talk to real estate agents, other investors, and your contractor. The more data you have, the more confident you’ll feel that your improvements are enough – but not too much.
Finding that balance can be a real challenge, especially if you are a first-time investor. Erring in either direction can cost you big time. But one way to find the right improvements for your rental house is to turn to your comparables again. If you know what the other rental homes in the area look like – and what they rent for – you can improve your property up to the point that it will allow you to charge market rents and no more.
One of the most damaging things you can do is to make your property nicer than others in the area. If most neighborhood houses have tile floors and composite countertops, don’t install hardwood and granite. While everything you upgrade should be of good quality, most of the time, luxury materials and high-end products are a complete waste of money. There are exceptions to this rule, especially if your rental is in a high-end neighborhood or certain upgrades would give you a big boost in a property. But even in such cases, you should aim for mid-grade materials and nice but not too nice improvements.
Lastly, avoid over-improving your rental house by remembering not to get too attached to the house. Try to view it as an investment, not a home. When you get emotionally involved in your rental properties, you may start to make renovations that you like but will not do much to improve profitability. It’s natural to want to take pride in your rental properties, but that pride should come from being the owner of profitable and well-run investment and not how much you spent on improving the property.
Would you like some expert advice on how to improve your rental property to maximize profits? We can help! At Real Property Management Valley Wide, our team of Merced property managers can help you find comparables, calculate your market rents, and much more! To learn more about what we offer investors like you, contact us today online or call us at 209-722-7761.
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