How Can You Improve Your Investment?
In my previous blog we discussed what types of property can be investment property and I provided a little bit of insight as to why someone might choose one type of property over another. Then I got down to the nitty gritty parts of investing and introduced you to a real estate investor named Ivan. Ivan thought he was making a good buy but, looking closely at the numbers revealed that Ivan might need to figure out how to improve his investment. Unfortunately, none of my readers had any idea how Ivan could improve his investment and/or his ROI. For those of you that forgot or are new to my blog ROI stands for Return On Investment one of the really important questions in any investment. So maybe I can help Ivan.
He Bought It Cheap but It Still Doesn’t Make Money- Why?!
In review: Ivan bought a house for $100,000.00 and he rented it for $8400 per year. After all of the expenses on the house were paid his scheduled ROI was barely over $100.00 per month. However, there is a hidden additional return. By the end of year one Ivan has paid down his mortgage by $1535.35 and by the end of year two it has been paid down $3125.32 total. Now keep in mind that Ivan’s mortgage payment is actually being made by his tenants’ rent payment, which means the reduction in principle is actually a gain to Ivan. So Ivan actually realizes more like $250/month in year one. Is this enough? Only Ivan knows for sure. Some investors are looking for more of a tax shelter with forecasted equity gain. Those investors will hold and rent for 2 to 5 years and then sell and realize the equity gain as ROI. Personally, I don’t think $250/month is enough to gain, particularly when Ivan doesn’t see half of it until he sells. So let’s see if we can help Ivan.
How to Improve Ivan’s ROI:
The first and most obvious thing to do is raise the rent. Even raising it $100/month will make a material difference to Ivan. If the condition of the property is standing between Ivan and a rent on the high end of market rate, then Ivan will need to roll up his sleeves and work on the property. Cleaning and a fresh coat of paint will go a long way towards improving a property. Also, these are things that the investor can do themselves, thus not piling on costs to increase ROI. In this case maybe Ivan can enlist his wife Irina to help. (Pro-tips: Cleaning is for both men and women! Women love to decorate-let Irina choose colors and she will be more likely to pick up a paint brush). Keep in mind that paint isn’t just for walls. If the kitchen cabinets are dated looking, consider painting them. This is an easy process, sand the cabinets lightly and apply a primer like grabber and let it dry thoroughly. Then apply the paint in thin layers and sand with very fine sandpaper between payers. This will give you a smooth professional look for your cabinets. I always recommend white for the cabinets as it will make a small kitchen look bigger and blends nicely with almost any décor. If you want to improve the kitchen more you can consider ordering new cabinet fronts. I like Barker doors online. They have a comprehensive video that shows how to measure accurately for cabinet doors and they have a wide variety of styles to choose from. You can also consider replacing the countertops later. There are a number of nice looking Flormica choices, that are affordable, can improve a dated kitchen and hold up to tenant wear and tear pretty well.
If there are carpets in the property and you intend to keep them have them professionally cleaned and sanitized. Ask your carpet cleaner if he can apply scotch guard. So you might ask, “why am I spending all this time cleaning up a rental?” Two reasons: One this is your investment, even setting aside the fact that you have a loan on the property you still have to bring 20-25% of purchase price in cash. ( In Ivan’s case he has $20,000 invested) Two: a nicer property will lead to higher rental rates and if you deliver a property in good condition the tenant is more likely to take care of the property. Simple improvements will help you increase your rental dollars. Anybody have any other ideas for Ivan and Irina?
See the latest fixer-uppers on the market.
Stay tuned to see if Ivan perishes in rehab hell or we can help him. Do you have any ideas?