5 Expensive Upgrades That Don’t Increase REI Profit
In order to make a surefire profit on your real estate investment, it’s important to feel the need – the need for speed. The sooner you can execute your rehab, the quicker you can get your house on the market, repay your loan and pocket your cash. In addition to getting hung up on paperwork in the early stages of securing a hard money loan, one of the most common places where the fix-and-flip process can fall behind is during the rehab stage. This lagging behind isn’t always attributed to contractors not meeting deadlines, but rehabbers trying to do too much. They mistakenly believe that the more they can upgrade the home, the more money they can tack onto the after-repair value. This isn’t the case. The key is not to rehab more, but to rehab smart.
Here are five expensive upgrades you should avoid in order to save time and increase profit in your real estate investment:
1. Adding a Home Office
Building a custom home office space sounds like a major selling point, right? Wrong. As a matter of fact, you’ll recoup less than half of your home office investment upon resale. Due to a sharp increase in mobile productivity over the years, many don’t even work from home offices anymore, but instead work from wherever they are at in the moment. If you dedicate a room to be a home office, it may even turn some buyers off who wanted to use that room for other purposes, such as a guest room or a play room. In order to save time and money on your rehab, you need to keep the rooms simple. Let the buyer decide what they want to use the room for and how they want to execute that vision. You’re rehabbing to fit as general of a perfect-home vision as possible so that you can attract a wide net of buyers.
2. Adding a Master Suite
Speaking of keeping rooms simple, here’s a major rehab upgrade to avoid: turning the master bedroom into a never-have-to-leave-it-ever-again master suite. The main reason to avoid overdoing it on the bedroom upgrade is that it will waste time – larger scale remodels will take months longer to finish than the loan repayment time allows. It will also eat into your budget like termites in the walls, collapsing your profit into a never-ending money pit. The places to really concentrate the bulk of your rehab work and budget are the kitchen and bathrooms; those are the rooms where a drastic upgrade gets the most attention.
3. Adding Style over Substance
Here’s another major rehab mistake: valuing form over function. The inevitable truth is that trends will fade over the years and what was once a must-have item in a home can quickly turn into a deal-breaker. Remember the fabulous fad of the pink bathtub with matching vanities from the 1950’s? It has quickly devolved into the eyesore of the century. Believe it or not, now the trend of all-white, sleek kitchens are starting to go the way of the dodo bird, into real estate extinction. When you rehab a room, remember to put your trust in classic appliances and fixtures and muted colors wherever possible. The trick is to create a warm, blank canvas on which the buyer can paint their vision. If you steer clear of specific trends which may soon fade, you will be able to market the home as an asset rather than a liability.
4. Adding a Sunroom
Adding a sunroom may seem like a fantastic idea to maximize your outdoor living space, but in reality it will return less than half of your investment upon resale. A sunroom is a true money pit that most home buyers won’t even be looking for. In fact, many look at a sunroom as a huge drain on a home’s energy efficiency which robs them of getting some real outdoor air and sunshine. Again, you should leave these rehab budget-depleting additions to the home buyer and keep your rehab upgrades simple and efficient. A small deck with some nice landscaping can prove to be enough to upgrade any back yard area.
5. Adding a Second Story
No better way to keep things simple than to add another story, right?…
You might think it could more than double the value of the home, since you’re doubling the amount of living space. However, it costs more time, money and trouble than many anticipate. In fact, adding another story has proven to be such a wasteful feat with rehabs that most hard money lenders will refuse to lend on the grounds of adding to the property’s original foot print and/or adding additional exterior walls. Adding an extra story, in addition to the deterrents of increasing your rehab budget and begging for time extensions, can also bring you higher property taxes. All in all, it’s a far bigger and less lucrative headache than it’s worth.
Find out how all this works by attending our next webinar.