Summary: For those of you who have purchased rental properties, did you renovate the property immediately? Or did you wait to renovate it until several years later? In this post, we talk about the benefits of the Renovate Early Strategy. Renovating a property immediately after purchase can help you grow your wealth much more quickly than waiting to renovate your properties.
When Leti and I first started investing in cashflowing rentals, we tended to renovate properties immediately after we bought them.
If there were tenants in the units, we would attempt to have tenants vacate their properties before their leases ended using something called “cash for keys.”
If the tenants refused to leave, we would renovate the other units and wait until they vacated to renovate their unit.
As we continued to do this property after property, we started to realize that there were numerous benefits associated with renovating your properties early.
This is what we are calling the Renovate Early Strategy.
This is in contrast to buying a rental and waiting several years before renovating the units.
[Disclaimer: we are not accountants, lawyers or financial advisors, so please consult your own team of professionals about the topics covered in this article.]
What are the benefits of the Renovate Early Strategy?
Rent appreciation
One of the major benefits of the Renovate Early Strategy is the ability to raise rents significantly.
Annual rent appreciation might normally be anywhere from 1 to 4% a year. However, after renovating a property, we have found that you can increase the rent by as much as 20-40%.
Not only that, but our annual rent appreciation also tends to be higher than average.
The reason for this is, if you have the nicest house on the market, your renters will pay a premium to live in your rental. Both of these factors increase your cashflow significantly.
Higher quality tenants
Yet another advantage to the Renovate Early Strategy is being able to improve the quality of your tenants.
By renovating a property to a higher standard, you can generally attract better tenants. These are tenants that take care of your property, don’t smoke in the unit, and keep vermin and other pests away by keeping the place clean, just to list a few.
This also means lower vacancy rates and fewer turnover costs when the tenant leaves.
Lower maintenance costs over time
When you renovate your units, it’s less likely that things break down.
Dealing with maintenance requests takes time. We couldn’t imagine the sheer number of issues we would have to deal with if the properties weren’t updated.
Also, when we renovate our units, we try to pre-negotiate with our contractors to give us a one year guarantee on their work.
So if something breaks down within the first year of the renovation and it’s due to improper installation, our contractor will cover the cost of the repair.
Qualify for Real Estate Professional Status
One of the biggest benefits of owning and operating cashflowing rentals is the ability to claim real estate professional status and shelter your W2 or 1099 income.
However, claiming real estate professional status requires that you spend a significant amount of time managing your rentals.
When you take on a renovation project early on, this enables you to rack up the hours needed to qualify for this status.
And as discussed in prior articles, you benefit tremendously from claiming real estate professional status early on rather than delaying this decision.
Take advantage of compounding
Probably the biggest advantage of the Renovate Early Strategy is the ability to grow your money more quickly because of the compounding effect.
When you have higher cashflow from rent appreciation and tax savings early on, you have more money to re-invest. This means there’s more time for this money to grow through compounding interest.
When we modeled this out, the compounding effect was one of the primary drivers of wealth creation.
Provide high-quality housing
While this isn’t a financial benefit, one other reason we like to renovate our properties early on is that we like the idea of providing high-quality housing to families.
It’s what we would want for our own family, so it makes sense for us to establish this high standard for our renters.
As you can see, there are numerous benefits to the Renovate Early Strategy.
What do you think? Have you implemented this strategy and seen similar benefits?
Please leave us your comments and let us know!
