Today’s REI Classroom Lesson
Today, Patrick Donohoe elaborates on where it makes sense to add value in your rental properties. A good way to do this is to look at nearby homes that are getting higher rent and see what they have that your property doesn’t.
REI Classroom Summary
In addition to upgrades, there are other ways to add value to the property, including Airbnb rentals.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
Mike: Welcome back to the flipnerd.com REI classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Patrick: Hi, everyone, Patrick Donohoe here. I am the President and CEO of Paradigm Life. We are a financial advisory out of Salt Lake City, Utah. You can learn more about our company at paradigmlife.net. We love real estate, we don’t like Wall Street, and so, therefore, today, I’m going to talking about just some ideas when it comes to rental property.
Mike: This REI classroom real estate lesson is sponsored by FlipNerd Investor Coaching, your blueprint to investing success.
Patrick: It’s ideas that I’ve personally, and it’s also some ideas that I’ve seen a lot of clients do because really, when you have a small amount of capital, the question becomes, “Well, do I save more and do another property or can I put that money to work and essentially improve the property and increase a return of an existing property?”
Okay. so let me give you some example. So first off, the value-add concept is really big with development and big syndicated deals where they’ll go in, buy an underperforming property, and then they’ll add a new roof and they’ll add washers and dryers, and they’ll add a parking lot or they’ll a playground or something like that, which will enable the big commercial property guy to increase rents, which would then increase value.
So you can actually do that on smaller properties, the same type of idea. So what it is, is basically you take a look at the existing property that you have and see ways in which you can improve it to be able to increase rents. Now, you don’t want to just guess. You want to do some due diligence around this because I’ve seen a lot of people go in and put a new kitchen with nice countertops and appliances, and really didn’t increase rent that much.
You really want to look at the market that you’re in. And so most real estate investors will have a good agent that is local there and they can do rent comparables. And you can look at what types of rents are being requested, and the higher ones, what type of characteristics does the home have? And really look at that. Now, it could be landscaping, it could be appliances, it could be remodeling a kitchen, it could be a backyard kind of a cleanup, it could be putting a privacy fence.
There are a lot of different ways in which you can improve a property to be able to increase rents. And so those are some normal ones, new carpet, paint, those are obvious, obvious ones. But I would always be looking and keeping a grasp or a pulse on the rental market in that specific neighborhood, and always look at, “Okay. If there are bumps, why are there bumps?” And what type of characteristics do those properties have that yours don’t?
And then go about trying to put $1,000 here or $1,200 there, or $5,000 there. It really depends, because if you could put in . . . let’s say it’s a new kitchen and landscaping for $20,000, okay, it might seem like a lot, but if you can increase your rents by $300 a month or $500 a month, that’s a really good return on that $20,000. And you can even start with $10,000 or $5000.
I remember a while, a long time ago, I put in a new privacy fence and landscaped a backyard of a duplex that I have, an up and down duplex, the upper has a backyard. And I was able to increase rents by $250, and it was a $10,000 investment. So it’s really looking at ways in which you can deploy capital that you do have, not into necessarily a new property but into an existing property that you have in order to increase rents.
A few other things too, and these may sound like weird ideas, but I’ve seen this recently, especially with the demographic shifts that are taking place. So you look at whether it’s a lot that you have or whether it’s a property that could fit more property on it, or it could even be a personal residence where you have a lot of land.
So there are these things called . . . there are some tiny home shows, and then the modular home shows, you have these thinks called granny pods now. So if you look at really assisted living and long-term care expenses for the aging population, it’s crazy how much it is just to provide that type of care. So there are these companies that have come out and they’re creating not just the granny pods, but they’re creating other kinds of little 500, 600-square-foot homes really that people are living in.
So it’s the minimalist idea. But the granny pod, and not that I’m advocating Grand Pods, I’ve just seen . . . I love looking at demographic shifts and how trends change, and really looking at families being able to afford care for their aging parents or family, the only solution is really, well, put them into to a home.
So granny pods, they’re between $75,000, $100,000, but if you have a decent sized property, these are basically pre-done, fully, and you can customize them, you can put webcams in there, you can put pill dispensers. It’s basically built for an older individual. And you can even do that with properties that may be somewhat flexible with zoning and have a few of those on there as your own little assisted living facility.
But also, these are tiny homes and really the modular idea, not mobile homes, but the modular idea where you can basically have housing for a student or someone else, that’s again, improving the value of an existing property.
And then the last thing is this idea of whether it’s VRBO or Airbnb, which has been huge. These are ways in which you can be in a California market or a New York City market where on a normal long-term rental, the rent-to-values are terrible. You never want to buy there for that type of strategy. But what I’ve seen, I have some friends that are in Southern California and they basically bought a lot of property. And if there were long-term rentals, it wouldn’t make any sense. But they’ve been using Airbnb and VRBO, and they’re getting 30, 40, 50% returns because these properties are always booked.
Now, there is more maintenance, there’s more cost associated with this, you need to know what you’re doing there. But really looking at converting an existing property that may not be cash-flowing that well into one of these short-term type of rentals using Airbnb, VRBO, there are a lot of other companies that are up and coming too, it’s going to require some money, maybe $10,000, $25,000, $50,000 to outfit the property with furniture and amenities, and so forth that make it desirable for those that are on those apps and services so you rent out your property.
So anyway, those are a few ideas that in which you can take an existing property and improve it. And I appreciate you guys being on today. Thanks for listening. Again, you can learn more about my company and the financial strategies that we use at paradigmlife.net.
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