“Top 10 Mistakes that Make Deals Go Bad” Series – Part 4

#4 Over Improving for the Neighborhood

An investor’s ability to recoup the costs of expenses of a home improvement can widely vary and depend on many important factors.  If you cannot recover the costs of improvements then you have over-improved the house.  The first factor is the future use of the property.  Is the property an upscale home in an executive style community with the intent to re-sell to a retail buyer?  Then there is less risk in over-improving.  If the property is intended for rental use then long lasting materials and less expensive finishes may be more in order.

The type of improvement also has a bearing on the ability to recover costs.  It is well known that kitchen and bath upgrades yield good returns when done well.  Appliances, countertops, cabinets and flooring can widely vary in quality and price, and generally the investor can expect an equivalent return to the investment made.  Exterior repairs such as windows, siding or a new roof can also yield good returns, especially when their current state of being are a detraction from the appearance of the house.  The return here might not be quite a strong as interiors since these items are necessary and a certain quality is generally assumed.  Again, rentals need replacement when functionally obsolete to prevent damages to the property.

Adding square footage is also good but be careful that the addition is not atypical for housing in the area.  A five bedroom house may not get the same bang per extra bedroom in a generally three bedroom community as the fourth does.  Rooms carved out of spaces which may not improve the overall layout of the interior might not be beneficial either.  Remember, appraising property is difficult enough in today’s real estate environment.  If an appraiser cannot compare the improvement to something else that has resold they will generally underestimate its value.

Finally, and most obviously, while the need to make an improvement may be the driving factor in make a home repair; the quality of the improvements weighs heavily on the ability to recoup the costs.  Poor craftsmanship, cutting corners, improper installation, and sloppy finished can have the opposite effect of the intended repair, and could end up costing you even more to correct, reverse, replace or remove after construction.

Rule #3 Forget this is a Business

One of the surest paths to failure is to forget that your real estate portfolio is a business. A sympathy attack for a tenant with a hard luck story costs you money just as if you owned a gas station and you sold your gas for $1.00 less per gallon than it cost you to a customer because he had a good story. You will be out of business quickly both ways.

Real estate becomes emotional. A commercial tenant’s dreams and livelihood are the business. A residential tenant’s home is in play. Losing either is traumatic, but that is not the landlord’s business. A landlord is not family and should not take on the costs of providing subsidized housing to some non-family member.

The landlord’s business is providing a useful property to the tenant at an agreed rate for the usage, or rent.  A land lord is not in the social work business, homeless relief, or other charitable enterprise. A landlord needs to remember that this is a business first and foremost. Lose sight of the purpose of a business, to make an acceptable profit for its owners, and you lose your profit margins. Always remember this is a business and run it as such.