Why Should You Upgrade Your Rental Property?
A client recently asked me, “Why should I upgrade my rental property?” and I thought it was a great time to write about this topic. This isn’t tax advice—I'm not a licensed CPA—but I love to understand my industry and help point clients in the right direction. You should always verify any advice with your accountant to ensure it aligns with your tax strategy.
Before diving in, if you’d like to see what I’ve been observing with older properties, check out my recent blog post: 15 Days to Lease: How Mission City is Navigating a Changing Rental Market. This is where I touch on some of the challenges older listings are facing in today’s rental market.
Now, back to the question at hand.
Direct and Indirect Opportunities of Upgrading
When considering upgrades to your rental property, there are both direct and indirect benefits. Here’s a real-life example from a recent conversation with a client:
Direct Benefits
We were looking at a $45,000 renovation budget, and I anticipated an increase in rent of at least $500, potentially up to $700-800. If we estimate a $600 increase, that’s an extra $7,200 in rent per year. This means the initial investment would be recouped in about six years.
It’s important to point out that part of this budget isn’t just about upgrading to shiny new materials. Some of it is regular maintenance for an aging property that will need attention sooner or later.
Indirect Benefits
There are also valuable indirect benefits. By tackling these updates now, you’re reducing the likelihood of future maintenance downtime, as well as potential vacancy loss. Staying proactive means you’re keeping your property aligned with market standards and renter expectations. This is particularly important because, as I highlighted in my previous blog post, older properties can sit on the market longer and risk losing rental value over time.
Tax Considerations: Capital Expenditure vs. Operational Expense
Again, I’m not a CPA, but here’s my understanding of the tax implications. Smaller repairs are generally treated as operational expenses, which can directly offset your gross income for the year. However, larger projects, like the one I mentioned above, could be classified as capital expenditures. This means the cost is depreciated over several years, spreading the tax benefit instead of taking it all in one year.
If your accountant agrees, there might be merit in going bigger with the renovation project to maximize depreciation benefits. For example, if you decide to fully renovate the bathrooms now, you wouldn’t have to worry about rising costs in the next five years.
Property Value Appreciation
Upgrading also directly impacts the property’s resale value. From what I’ve seen, projects like this typically deliver a 1.5 to 2.0x return on investment. So, a $45,000 renovation could potentially increase your property’s value by $67,500 to $90,000, which is something to seriously consider, especially if selling the property is on your horizon.
Strategic Planning for the Future
Lastly, even if your current tenant (let’s call him Steve) stays for another year at a higher rent, it’s always wise to be proactive. Having a solid plan for future renovations ensures you’re ready when the time comes. Whether it’s addressing deferred maintenance or tackling larger projects, being prepared will put you in a strong position to maximize both rent and property value.
If you're interested in learning more about proactive, strategic property management and how upgrades can benefit your rental property, I'd love to discuss how we can help you maximize your investment. Feel free to reach out at 805-319-7000 or email me at info@missioncitypm.com. Let’s ensure your property stays competitive and profitable in today’s market!
