One of the most important things to consider when investing in rental homes, is whether to upgrade, and how much. Many sources will mention things like “re-positioning” or “value adds” to maximize the rental value. However, it is important to not go crazy with this! And really, what does “re-positioning” actually mean in real estate? Are you going to move the house to a better neighborhood?
Be realistic about rental projections
Every investor wants to maximize their ROI. Be careful when projecting rent prices, and how much you might be able to add to your property’s value. No matter what you do to a house, you’re not likely to get much higher rent than what renters are currently paying in that neighborhood. For example, if your property is located in a neighborhood where most of the homes are renting for $1400, your home is probably not going to rent for $1600+. Even if you add a ton of upgrades, it’s still a $1400 neighborhood.
Also, when researching rental values, it is important to look at the LEASED prices, not the asking prices, of other homes rented nearby. An optimistic landlord may have the house next door listed for rent at $1700, but that doesn’t mean anyone will pay that much. This is why it’s called an “asking price”. For comparable rentals (“comps”), try to stay within 1/2 mile, compare LIKE properties, and look for rentals leased within the past 6 months.
Avoid over-renovating
Some owners feel that a newly renovated home with lots of fancy upgrades, must be a lot more valuable than the “less nice” homes nearby. However, you cannot significantly change the value of a home by throwing more money at it. Avoid costly or excessive upgrades. For the most part, a rental home should be functional, clean, and fit with the surroundings. Replace old worn out carpets (ideally with more durable flooring like vinyl plank or tile). Paint. Fix anything broken. Make sure the appliances are working properly and that they’re the same color! Unless you’re renting out the Taj Mahal, there is no need to go crazy with fancy back splashes and fixtures.
No house is “special”
Unless the home is located on a private island, the neighboring homes will affect your property’s value. Consider this: If a person is willing and able to pay $1700 for a rental home, they typically want to live in a $1700 (or better) neighborhood. Most folks won’t be happy with a $1700 home in a $1400 neighborhood. Hence the title of this article, don’t put a palace in an average neighborhood. If your home is the nicest on the block, you spent too much money on it. The law of diminishing returns comes into play. Unless you are buying and renovating entire blocks, you cannot change the neighborhood.
Ultimately, you should always look at a rental home as any other investment. If your goal is to make money, then you want to make sure the numbers work before throwing away a bunch of money on unnecessary upgrades.
If you would like help determining the value of a rental home in Las Vegas, please feel free to contact us. We will be happy to help!