When you own a rental apartment, there will come a time when apartment renovation is needed. Revitalizing outdated or worn spaces not only attracts top-tier tenants but also lets you increase rental income and secure long-term investment. However, they often require a significant financial investment, and determining whether the project will result in a satisfactory return necessitates thoughtful deliberation and meticulous planning. Let’s explore the numerous benefits and key factors to contemplate when undertaking such projects.
Is it a good idea to do an apartment renovation?
There are numerous benefits of apartment remodeling, but whether it is a good idea to do an apartment renovation depends on various factors. Here are the benefits and some considerations to help you determine if an apartment renovation is a good idea:
Reduce Ongoing Maintenance Cost
Apartment renovation can be a smart move to save money on constant repairs. When you keep calling in professionals like plumbers and electricians, it not only costs a lot but also disrupts your tenant and yourself. It’s usually a good idea to renovate places like the kitchen or bathroom where problems often pop up. Although the upfront cost might be high, it can save you a bundle on future fixes.
If you hardly ever deal with repairs, you might not need to renovate just yet. But if your tenant keeps calling for repairs more and more, it’s time to think about making improvements. There are resources that can help you decide where to spend more money on rentals and renovations and where you can save. This way, you’ll make sure your expense is worth it in the long run.
Charge Higher Rent
Renovating your rental property gives you a strong reason to charge higher rent prices. When you upgrade features, create a modern look, and improve functionality, you can attract top-notch tenants who are willing to pay more for an updated and appealing living space.
Before deciding on a renovation, it’s essential to calculate the potential rent increase compared to your renovation budget. For instance, if you spend over $25,000 on renovations but are able to raise the rent by more than $700 per month, this allows you to recover your expenses in around 5 years. It’s important to note that not all renovations need to be as extensive. Even minor improvements can lead to a significant rent increase. That’s why it’s important to assess the financials for each unique situation. Additionally, the prospect of higher rents can attract a better quality of tenants, which is another added benefit.
Decrease Tenant Turnover
Reducing tenant turnover through remodeling apartment is another benefit. Renovated apartments often lead to better living conditions. When tenants are comfortable and satisfied with their apartments, they are more likely to stay rather than look for a new place to live. Including amenities like energy-efficient appliances, better insulation, or improved heating and cooling systems make the tenants save them money on utility bills. When tenants see that their landlord is willing to invest in the property’s maintenance and improvement, they feel a sense of pride in their living space, develop a sense of loyalty to the property and the landlord, and feel valued and cared for. This can lead to a stronger attachment to the apartment and a desire to stay longer.
Increase Property Value
When you’re not living in your property, think about whether renovations will make it worth more. Some upgrades, like a better kitchen, can increase its value a lot, up to 20%. But not all changes make a big difference. For example, fixing hallways doesn’t add as much value. So, research which renovations will give you the most bang for your buck. Furthermore, apartment renovation can justify modest rent increases. When tenants perceive added value in the form of improved quality or amenities, they may be more accepting of a slightly higher rent, making it financially viable for both parties.
Make the Rental Property Stand Out
Newly renovated apartments hold a distinct advantage in the competitive rental market. In a sea of rental options, these upgraded units catch the eye of prospective tenants. When tenants browse available apartments and see the improvements you’ve made to your property, they are likely to find your apartment more appealing and attractive. This increased appeal can sway their decision in favor of your apartment over others in the same area, creating a sense of desirability that makes them less inclined to seek alternative housing options.
While some renters focus solely on finding the cheapest option, most are in search of a property that meets their requirements, provides good quality, and comes at a reasonable price. And when there are lots of homes available, it’s tougher to rent out lower-quality ones. Modern amenities, fresh aesthetics, and improved functionality can make your property stand out as a comfortable and convenient place to call home.
Enjoy Tax Deductions
Renovating your apartment can offer tax benefits that help improve your financial situation in the long run. One significant advantage is depreciation, where the costs of major renovations can be spread out over several years, allowing you to deduct a portion of the renovation expenses annually. It’s important to differentiate between repairs and improvements, as improvements are usually considered capital expenses and subject to depreciation. Additionally, certain energy-efficient renovations may qualify for tax credits, directly reducing your tax liability. If you use part of your renovated apartment exclusively for business or as a home office, you may also be eligible for a home office deduction. Finally, when you eventually sell the property, the renovations that increase the property’s basis can help lower your capital gains tax, resulting in potentially lower taxes on your profits.
Apartment Renovations You Can Do
Changes to your kitchen, bathroom, floors, or even the structure of your flat, such as demolishing a wall to make it more open, can all be considered major renovations. To stay on time, plan ahead but keep in mind that you’ll need formal permits for these changes.
- Kitchen. Upgrading your kitchen can make your apartment worth more, but it can be expensive, ranging from $15,000 to $60,000. If you’re short on cash and your kitchen is in decent shape, you can freshen it up by changing things like doors, countertops, sinks, and appliances. This can make it feel like a brand-new kitchen without spending too much.
- Bathroom. Bathroom renovations are common because bathrooms tend to get old and worn out quickly due to frequent use. Maximizing space is essential, especially in small apartment bathrooms, so consider replacing cubicle-style showers with glass panels to create a more open feeling. Be cautious about waterproofing; hire a specialist with apartment experience to avoid potential liabilities for water damage in your apartment.
- Windows. In apartment complexes, the body corporate typically owns and replaces all the windows to maintain a consistent look. Individual owners usually can’t change or paint them because it would create differences in appearance. However, you can cover them from the inside with things like plantation shutters, but be sure to check your strata by-laws carefully before making changes. Some rules may restrict window coverings that affect the building’s exterior appearance, so it’s essential to verify everything before you start altering anything.
- Lighting. In modern apartments, ceilings are often solid, making it tricky to replace flush mount lights with recessed options. Surface-mounted spotlights are an alternative. Adding a head ceiling is also an option creating a space for recessed LEDs or pendant lights. However, this may reduce headroom, and there are regulations regarding minimum room heights to consider.
Things to Consider Before Renovating Your Rental Apartment
When you finally decide that it is time for apartment renovation, here are some other factors to consider when renovating your rental apartment:
- Legal Obligations and Common Courtesy. Renovations can sometimes mean tenants need to move temporarily or experience disruptions in their daily routines. It’s important to maintain clear and transparent communication with tenants regarding renovation plans and schedules. Landlords must follow local laws and regulations related to tenant rights, offering proper notice and compensation when required.
- Future Upkeep Cost. In rental apartment renovations, it’s wise to select durable, low-maintenance materials that will cut down on future upkeep costs. Opt for materials that can withstand everyday wear and tear, are easy to clean, and require minimal repairs. Striking a balance between aesthetics and practicality ensures that your renovations will endure for the long term.
- Budget and Cost. Prepare a comprehensive budget and perform a cost evaluation. Define the extent of the renovation, factor in material costs, labor charges, and any unforeseen expenses that might emerge. Maintaining a balance between your renovation goals and the expected return on investment is important.
- Return on Investment. Compute the projected rise in rental income in comparison to the renovation expenses to gauge the project’s profitability. Take into account the characteristics of the local rental market, demand, and rental patterns to make well-informed choices regarding which renovations will yield the most favorable return on investment.
Different Ways to Finance an Apartment Renovation
According to Angi.com, homeowners spent $8,484 on home improvement with an average of 3.2 projects, while home maintenance spending was $2,467 with 7.5 projects in 2022. Home emergency spending averaged $1,953 across 1.8 projects per household. This information serves as a reference point to assess your budgetary needs. Understanding these spending trends in 2022 among homeowners can provide valuable context for those seeking different ways to finance their apartment renovation. Here’s how:
- Use your savings. Financing your apartment renovation from your savings involves using your own money to cover the costs. This option offers full control over your finances and avoids interest payments, but it may deplete your savings, and you should ensure you have a sufficient financial cushion for unexpected expenses.
- Borrow from private money lenders. A private money loan usually means getting funds from an individual like a friend, family member, or someone you know personally, rather than a professional lender. While these arrangements can be less formal, it’s important to handle them with care and professionalism to prevent misunderstandings or conflicts.
- Leverage your home equity. If you own a home or other property, you can tap into your home equity through a home equity loan or line of credit. This allows you to borrow against the value of your property, typically at lower interest rates than personal loans. However, it puts your property at risk if you can’t repay the borrowed amount.
- Use a crowdfunding website. Crowdfunding platforms offer a unique financing option for apartment renovations. You can create a campaign detailing your renovation project and solicit contributions from a wide audience. This approach can be effective for smaller projects, but success depends on your ability to attract donors.
- Consider hard money loans. Hard money loans, including multifamily rehab loans, are typically short-term loans secured by the property itself. They are often used for real estate investments and renovations. These loans may have higher interest rates but can be accessible for those with less-than-perfect credit or when a quick funding turnaround is essential.
Apartment Renovation FAQs
What makes apartment renovation different from renovating a house?
Apartment renovation differs from renovating a house primarily due to constraints related to space, layout, and shared structures. Apartments typically have limited space and require compliance with building regulations and neighbor considerations. Additionally, access and logistics can be more challenging in apartment buildings compared to standalone houses.
What kind of professional help do I need when remodeling my rental apartment?
When remodeling your rental apartment, you’ll likely need professional help from various experts, including contractors, architects, interior designers, and possibly engineers. It’s important to seek advice from professionals qualified to work on Class 2 Buildings, which include units, apartments, and condos. These experts can help navigate building regulations, design considerations, and ensure the renovation is safe and compliant.
What is the difference between “private money” and “hard money”?
The primary difference between “private money” and “hard money” is the source of the funds. Private money typically refers to loans from individuals or non-professional sources, like friends or family, while hard money often comes from professional lenders or firms specializing in real estate loans. Hard money loans are typically more structured and may have stricter terms and higher interest rates than private money loans.
Fast-Track Your Apartment Renovation Projects with Hard Money Loans
When it comes to renovating rental apartments, hard money loans emerge as a valuable tool for real estate investors. These loans offer several advantages tailored to the specific needs of apartment renovations. Their swift approval process allows investors to secure funds promptly, which is essential in competitive real estate markets. Additionally, their asset-based nature, utilizing the property as collateral, aligns perfectly with the renovation focus of improving apartment units. This makes hard money loans a convenient choice for seizing timely investment opportunities and covering both the acquisition and renovation expenses associated with rental properties. While they may carry slightly higher interest rates, the speed and flexibility they provide empower investors to maximize their real estate investments, especially when dealing with apartment renovations aimed at attracting tenants and increasing rental income.
KEY TAKEAWAYS
- Apartment renovation attracts better tenants, boosts rental income, and ensures long-term investment.
- Formal permits and planning ahead are needed for major renovations.
- Apartments generally have restricted space and necessitate adherence to building codes and neighbor-related considerations.
