Tim Herriage from Real Estate Industry New wrote a relevant article this month:
HOW BIG IS THE RENTAL HOME (SFR) INDUSTRY? Renovation for Sale & Rent
RENOVATING TO RENT OR TO SELL?
How much money is spent renovating single-family homes under these three scenarios; renovation to sell, renovating to rent or renovating or refreshing a property between renters, otherwise known as a “turn.”
Nationally these are billion dollar construction related segments that are typically fulfilled by local contractors, and in a few cases by companies that specialize in serving flippers and landlords.
Each of these renovate to sell or rent transaction types is deeply dependent on four things; property class, the location, and state of the property, guided by the goal of the investor.
GETTING TO THE DOLLAR VALUE OF FLIPS, RENTALS & TURNS?
First, “property class” is the measure that attaches a demographic characteristic (schools and jobs) and then “desirability value” to a SFR property. An “A class” property (possibly luxury) is an up-market property in an upper class neighborhood. A “B” property is a sound property in a solid middle class neighborhood. A “C” property is a less than pristine property in a reasonable neighborhood, while a “D” property is typically a poorly maintained property in a troubled neighborhood. All these property classes attract very specific types of investors, but if you are a typical SFR investor, A and B class neighborhoods should be your target as Cs and Ds require a particular expertise to make a profit. A and B houses rent most easily, to tenants that care, pay more and more reliably than the average, while the houses appreciate more predictably.
Second, “location” feeds into the ratings of these A, B, C or D property categories.
Third, the “state of the property” and what needs to be done to the property to bring it to a marketable condition (sale or rental?) The condition of the property dictates what tasks need to be performed to make it habitable and attractive. These tasks are then classified by trade, such as carpenter, electrician, plumber, etc. The next calculation is labor hours required to repair and/or install the materials needed to complete the renovation or turn. This list of tasks or line items to be fulfilled by craft, hours and materials is called the scope of work or SOW. A bid and a contract may follow.
GOAL OR OUTCOME OF THE RENOVATION/TURN?
There is one goal, and that is to profit in the short term from sale of the property as a Fix & Flip to Retail Sale, or generate a desirable rental property that rents easily for better than market rent over a longer time-frame. a cost effective renovation should make the property attractive to the ideal buyer or a renter.
Based on the property class, A, B, C or D, and the expected market, buyer or tenant demographic, then dictates a property renovation “finish schedule.” This schedule is literally the finishes desired in a task, like granite, solid surface or laminate counter tops, defined as fitting luxury, aspirational mid market, affordable or inexpensive finishes, part of delivering safe, secure and attractive accommodation for your market.
These class and goal variables match material standards (a finish schedule) and then supplier SKUs (stock keeping units or model codes) to meet the highest and best outcome and investment return.
SETTING THE RENOVATION BUDGET
We have outlined the property class, location, condition as a goal to defining what a renovation should look like and by extension, what it should cost.
Estimates are very property specific and we will go into this next issue but without a specific SOW by property, and using very basic estimates, a good rental renovation is going to range somewhere between, $10,000 and $30,000. A fix, flip and sale, average $20,000 to $50,000. A rental turn can range from a basic $600 to $5,000 and up.
Note: Elements By Design is a company we've created to service our clients that provide renovation services. From clean-up and staging to remodeling and construction we can assist in maximizing a properties return on investment. Call us at 520-618-7331 for a free consultation.