Author Topic: Remote Rental Renovation: piecemeal or full makeover?  (Read 291 times)

elysianfields

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Remote Rental Renovation: piecemeal or full makeover?
« on: November 29, 2017, 05:05:45 AM »
We bought a 4BR 2BA house, built in the 1960s in a HCOL area of the US, many years ago.  After residing in it for a few years, we converted it to a rental when my job took us overseas.

Meanwhile, the house has nearly tripled in value.  We've refinanced and are a few years into a 30-year fixed at a very low rate given US mortgage financing history.  Because rents in the area have risen substantially, the rent comes to not quite double our PI (we don't escrow).  It would frankly cost us too much to move back into this house, if we ever returned to the area.

We've replaced most of the important house utilities/appliances in the last few years, but our current property manager warns us that he's having trouble finding parts for our bathroom fixtures.
 He worries about an irreparable leak that would require emergency work that would leave us sub-standard results.  He recommends having not just the bathrooms redone, but also having our tenants quit so that we can perform a full renovation.  The kitchen badly needs an upgrade, though the current tenants - mostly the same ones who have lived there from the beginning (it's a group house) - seem cool with it.  If we did a full renovation, we'd probably insert skylights in the kitchen and upper bathroom (both are North-facing) and also replace the roof as well to ensure a good seal and because the shingle roof is approaching end-of-life.  We'd probably also repaint inside, remove the wall-to-wall carpet, refinish the hardwood floors, and replace all the doors, banisters, &c.  Separately, the concrete on the back terrace, the stoops, and the driveway all need replacing, especially to ensure that rainwater flows away from the house.

Since we're still overseas and cannot afford the time and money to oversee a full renovation on-site, we're thinking of doing just one bathroom at a time and leaving the rest for later.  We've approached the tenants of having them stay during the bathroom work (they don't know about the possibility of a full makeover) in return for a rent abatement (amount TBD).

If the tenants ever departed of their own accord, we'd definitely need to proceed to the full makeover to get the kitchen et al. up to re-rental condition.  If we did the full makeover now, we'd control the timing, but we'd have to finance it, and the ROI isn't especially promising.

Meanwhile, we have one child in college and another heading there in a few short years, creating a cash crunch.

Finally, our current property manager will retire next June.  I know he really wants to supervise a full makeover because he's a former builder and he enjoys it, and we believe he could provide good quality control; we, of course, reserve the decision on how to proceed to ourselves.  He has one general (not fully fleshed-out) bid in hand and two others getting worked up.

What do you folks see and recommend in our situation?  What would you do?

Kroaler

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Re: Remote Rental Renovation: piecemeal or full makeover?
« Reply #1 on: November 29, 2017, 08:07:05 AM »
I would run till fail especially with tenants there.


Also get second opinions on how bad the updates are needed and if the items in question are truly at the end of their service life.



Unless*   ,   the next time the tenants leave you can do full makeovers of key areas like bathrooms and kitchens and justify substantially large increase in rent.   

You say your cash crunched.  I imagine a full reno in a 1960s house in a HCOL area could push 45-60K easy.     Start adding in roofs and concrete work and a few extras here and there and your doing a 125k remodel.

Just my thoughts...

waltworks

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Re: Remote Rental Renovation: piecemeal or full makeover?
« Reply #2 on: November 29, 2017, 05:31:26 PM »
Sell the property.

Easy.

-W

YoungGranny

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Re: Remote Rental Renovation: piecemeal or full makeover?
« Reply #3 on: November 30, 2017, 07:14:39 AM »
Honestly I'd consider selling the property. The rent on my unit come out to over 3x the PI and comes out ahead of the 1% rule (at 1.3% i believe) so making less than double the PI doesn't sound very good. If the property value has risen significantly it seems better to get the equity out the house and move on. You said you won't move back into it if you move back to the area and with the brief numbers you've given I doubt the cashflow is very high; rather it kind of seems like a money pit. I'd preserve the equity and move on; if you want a rental I'm sure you could find a better deal.

hoping2retire35

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Re: Remote Rental Renovation: piecemeal or full makeover?
« Reply #4 on: November 30, 2017, 07:41:00 AM »
I agree with others; rent 2xish  PI isn't too bad, but if you are sitting on 3X the initial purchase price then it is time to sell. You could also do a full reno if it will justify 3X rents, which I doubt. Sell.

tralfamadorian

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Re: Remote Rental Renovation: piecemeal or full makeover?
« Reply #5 on: November 30, 2017, 09:18:14 AM »
Given your comment about a recent refinance- did you cash out your equity?

1) If you cashed out and your PITI (notice I added the T&I) is still roughly half the rent, then I would consider possibly keeping it. I suggest adding the T&I because many HCOL areas also have high T&I so it shouldn't be left out. Have your rental manager give you an estimate on all these updates, add 50% to that number, then see how many years of rental profit it would take to cover that. One year, two years, 10 years, more?

2) If you refi'd and did not cash out your equity from market value increasing x3 and the rent still only covers P&I x2, then I would sell or 1031 to something more profitable.

In either situation, I would use a calculator like this: http://www.calculator.net/rental-property-calculator.html
with zero closing costs and down payment equal to your equity to determine what your IRR is compared to the stock market.

Kroaler

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Re: Remote Rental Renovation: piecemeal or full makeover?
« Reply #6 on: November 30, 2017, 09:33:52 AM »


In either situation, I would use a calculator like this: http://www.calculator.net/rental-property-calculator.html
with zero closing costs and down payment equal to your equity to determine what your IRR is compared to the stock market.

Thanks for the link!

MommyCake

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Re: Remote Rental Renovation: piecemeal or full makeover?
« Reply #7 on: November 30, 2017, 10:26:10 AM »
I would run till fail especially with tenants there.



+1.     Repairs are necessary.  Upgrades are not.  Fix things when they break.  Upgrade bit by bit between tenants, if finances allow. 

backyardfeast

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Re: Remote Rental Renovation: piecemeal or full makeover?
« Reply #8 on: November 30, 2017, 01:39:40 PM »
I would run till fail especially with tenants there.


Also get second opinions on how bad the updates are needed and if the items in question are truly at the end of their service life.



Unless*   ,   the next time the tenants leave you can do full makeovers of key areas like bathrooms and kitchens and justify substantially large increase in rent.   

You say your cash crunched.  I imagine a full reno in a 1960s house in a HCOL area could push 45-60K easy.     Start adding in roofs and concrete work and a few extras here and there and your doing a 125k remodel.

Just my thoughts...

I'd consider selling, too. 

Just wanted to add our experience with reno numbers.  We just did a full gut of a 2400 sq ft, 70s house that had been updated and added onto in 2004.  That reno included updated plumbing, wiring, insulation, etc that we didn't have to do.  We did do some layout reconfiguration, which wouldn't be on your list, and put in nicer fixtures than we would have for a rental, but my husband is a prof. carpenter/builder so our labour costs were significantly lower.  We came out at almost $250K.  Depending on how busy the trades are in your area (how hot the real estate market is) and how much the building codes have changed in your area/state since the 1960s, a full upgrade could be very expensive.

It's easy to look online and price out cosmetic renos, or per square foot building costs.  But once your trades or the GC pulls permits, every stage needs to be inspected, and that means everything has to comply with *current* codes.  A cosmetic upgrade can quickly become complicated if the entire plumbing and electrical and insulation needs to be redone, a leak may have caused more damage, there turns out to be asbestos in the drywall or flooring, etc (our muni won't even look at reno permits until an asbestos test has been done and remediation adds HUGE $).  In a low-key region these things may not be an issue.  But in a highly regulated area (California comes to mind!), it can turn into a much bigger project than anticipated, very quickly.

I would proceed with a LOT of caution, especially if budget is an issue and you can't be there in person.  Each issue encountered = more time, too, and for you, more time= months without rent.  A full reno could EASILY take a year.  Ours came in at 8 months, and several trades commented that that was the fastest they'd ever seen.  That happened because I acted as a sub-project manager and DH worked 14-16 hr days for months.  This is not a simple undertaking.

Kroaler

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Re: Remote Rental Renovation: piecemeal or full makeover?
« Reply #9 on: November 30, 2017, 02:01:10 PM »
I wanted to add an example of the "gotchas" that the post above is discussing.


I tore out one side of the stair railing , banister and spindles and threw it away by accident. ( the demo crew got a little over zealous..)



Long story short, I pulled quotes to have that replaced. Just the railing support. The stair company said they wont touch it unless I have the entire stairway re treaded to meet the current equalization code requirements.      Luckily I have a carpenter whos going to just do it.   But this is an example of how little stuff gets deep FAST depending on how codes have changed over time

If I had to pay to have the risers and strings completely redone that would be large $