ROI. Return-on-investment.
It’s a buzzword that gets thrown around a lot in this business. We’re talking about either renovations that you’ve done, the seller has done, or even that your turnkey real estate company has done: and now they’re claiming that the money you (or they) put into it is going to directly result in greater profits because of an increased value.
Practically speaking, for the real estate investor, you feel a ROI most when you can a) increase your rental prices as a direct result of a renovation, improvement or delivery of service, or b) sell a property for a higher price. Those who sell investment properties for retail prices live and breathe ROI.
But for the average buy and hold investor, is return-on-investment really worth focusing on? Does it really matter?
Well...yes and no. More importantly, how is your ROI really calculated and what do you need to look for as a passive investor that is going to help improve and stabilize your ROI?
3 Ways ROI Matters in Buy & Hold Real Estate Investment...and 2 Ways It Doesn’t
The Good:
There’s an Immediate Payoff in Rental Rate
For a passive real estate investor, you can see an immediate return in your rent. When you invest in the quality of your properties: whether it’s in improving your kitchen, your bathrooms, your flooring, the outside curb appeal, the roof, sophet and fascia or other areas, it allows you to charge a higher premium for your properties. As an investor, that means you will receive higher quality residents, more rent money each month, and you’re investing in the longevity of your property for the long-term.
Now comes the best part. Your property management. By picking a pro-active property management company that focuses on respecting residents and offering a very high-level of resident engagement, you are able to match the look and feel of the property with the delivery of service. This plays a very important role on the ROI of your property as the best residents are going to not only be attracted to the best properties, but they will be much more attracted to the best service.
Too many passive investors fail to take into account just how important quality property management is. They tend to focus on how is management delivered to them as an investor. While that is important, for the long-term impact and reliable, consistent return, how a management company attracts and treats residents is of way more importance!
It Can Impact Your Resale Value Dramatically
Obviously, the primary motivating factor of most renovations we see on television, from flippers, and even from your average homeowner has to do with resale value. They’re looking to get their return-on-investment there. For a buy-and-hold investor, that’s not an immediate turnaround, but it is something you may be able to benefit from down the line.
We are big believers in addressing deferred maintenance on the front end. Sometimes, we will miss items as that is simply human nature. However, we always want to prepare properties to operate for years to come as consistently as possible and are always thinking two steps ahead for resale. An investor is almost always going to have to address issues before they can sell a property.
If we can show a record of having fixed items along the way from the beginning and kept up with basic maintenance, then surprise costs at the time of sale can be minimized. That is also an attractive feature for a new buyer. They can see that the property was well and properly maintained and they can create a reliable cost schedule going forward.
It Keeps Your Moving Forward with What You Have
While not an exact benefit of your ROI, it is a motivator to move forward and improve your properties. Passive investors all need to work hard to get the most out of what they have. This is your portfolio after-all and maximizing its' return while continuing to build is paramount.
Renovations help you get the most out of what you have. Investing in them help when it comes to depreciation, rent value, and even neighborhood revitalization. If there wasn’t a payoff, no one would bother!
The Not-So-Great:
It May Not Have That Big of an Impact on Resale
We mentioned that a big motivator for renovating a property is usually resale. Most people who renovate with resale benefits in mind are going to sell pretty immediately and in the market as it is in that moment. For a buy-and-hold investor, you might not be selling for a long, long time. Maybe decades!
A buy and hold investor, purchasing far from home, should absolutely be looking for a consistent and reliable return and not a quick hit. DO NOT buy property if you are going to be constantly looking at it monthly and always have the idea of selling in the back of your mind. You will be better off buying close to home and looking for a quick sale.
This is a 5-7-10 year or more type of investment and should be viewed that way. You don’t know how the market will fluctuate along the way, or how depreciation will affect your renovations! Building for and banking on a boost in return from a sale is not exactly the smartest move for a passive investor. Knowing it is there is phenomenal, being able to relax and wait for it is a skill!
Other Factors Can Outweigh the Value of Your ROI
We mentioned that other problems can cause you to fail. And they really can. Let’s expand. If you spend the time and energy investing in a brand new kitchen but see no returns because you can’t find a good tenant, you have a 0% return on your investment (unless you turn around and sell). You’re also experiencing negative cash flow because you’re dealing with a vacancy.
That’s why planning your renovations is extremely important: ensuring that they’re ergonomic, on trend, and attractive to prospective tenants.
By the same token, you need to be sure that your tenants are being vetted. A bad tenant can easily damage or destroy that improvements you’ve poured so much money into. There go your returns: and now you have to go through the cost of repairs, too.
The more you can avoid these problems, the better off you’ll be!
At Memphis Invest, we’ll help guide you through the whole process to ensure that every repair and renovation is as effective as it can be: so that you get the most out of your investment and maximize your cash flow!
