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Not All Dollars Are Spent Wisely: How to Avoid Overspending on Renovations

By U.S. News & World Report

Real estate investors, whether looking to purchase a rental property or determining how to put a long-term rental back on the market, can anticipate reaching into their pockets for renovations. While most renovations will require some capital expenditure, not all dollars spent are equal. Investors should understand how to measure a renovation’s return on investment to make smarter improvement choices.

Contemplate, Then Renovate

Prior to beginning any renovation project, it is important to consider the financial impact renovations can have on a property from a rental perspective. Every renovation choice by a property owner has to make financial sense. It is not smart to put in more than you are able to get out.

[See: 12 Home Improvement Shortcuts That Are a Bad Idea.]

Renovations can affect rental rates, vacancy and the long-term performance of your investment property. Here are three big items to consider at the outset:

1. Improving the property to meet municipal and building code standards. Before dreaming about the returns you may garner post-rehab, make sure you are covering the basics. Can you legally lease your investment property? If a property is uninhabitable or lacks a certificate of occupancy, then renovations are necessary prior to a tenant moving in. This is particularly the case when it comes to complying with applicable laws, regulations and building codes that may have changed since the property was initially built.

2. Improving the property to a condition desired by the local market. Maybe a property is in decent shape, but it’s outdated compared to available rental properties in the neighborhood. In this case, renovations are optional as you may be able to find a tenant at a lower rental rate. But in order to charge market rent and drive solid rental demand, making improvements consistent with local comparable properties may be a good idea. Conversely, sometimes investors rehab a property far beyond what is necessary because they make the false assumption that all improvement dollars can push rents higher. If all of the homes on a street have carpet and tile countertops and rent for around $1,500 per month, do not expect that investing in hardwood floors and granite countertops will increase rent to $2,500 per month. The market may be unwilling to agree with your expectations of rent and the result may be that you have a very nice, very empty house until you decide to adjust your rent to what the market will bear.

3. Understanding the ROI and lifespan of renovations. As a rule of thumb, you should consider renovations that yield at least 20 percent in initial annual return on your renovation investment and have a life span long enough to last well beyond returning the initial cost. For example, if you renovate all of the bathrooms in your rental for $12,000, you should make sure those improvements will allow you to increase the rent at least $200 per month ($2,400 annually = 20 percent of renovation cost). Bathrooms generally have a lifespan of 20 years, so by the time you need to do another renovation, your $12,000 renovation costs would have grossed you $48,000 in additional income. That means you made $36,000 on your initial investment of $12,000 over 20 years. That is a 300 percent ROI over 20 years and a simple annualized return of 15 percent. To put this into perspective, the Standard & Poor’s 500 index annualized return for the past 20 years was 6.1 percent.

[See: Weird Home Features That May Confuse Homebuyers.]

While the situation described in item 1 tends to be a matter of following the applicable laws and regulations to comply with standards, items 2 and 3 fall into a gray area since there is no clear roadmap to determine what type of renovations should be done or how extensive they ought to be. This really comes down to you, as an investor, to understand the local market and work with local resources that can assist your renovation efforts.

Renovations require weighing the costs against the benefits. Holding off making renovations to a property that needs them may mean that to get a potential renter in the door you may have to price the home below market rent. While you did not have to make that initial spend, devaluing your investment could mean that you might lose out on potential long-term upside from rental cash flow.

The overarching solution may be to improve a property to meet market standards in order to charge market rent and create consistent demand for your investment property.

Consider the Renter and the Next Owner of Your Property

Property owners must understand and analyze not only how renovations may impact rent but how they may impact the overall value of the property as well.

There may be many reasons why you may want or need to sell your investment property, so it’s important to consider the potential value of those improvements relative to their cost on a retail basis. If you improve certain aspects of the home that are less valuable to a potential buyer than what they cost, you run the risk of losing money and reducing your equity in the property.

Here is a brief snapshot of how the numbers shake out when it comes to the value versus cost of renovations. The National Association of Realtors highlights how renovations resulted in value for homes in their 2015 Remodeling Impact Report. Keep in mind that these numbers are averaged, so the percent of value recovered may be substantially higher or lower on an individual property than indicated in the report.

Type of Renovation Remodelers’ Cost Estimate Realtors’ Estimated Cost Recovered Percent of Value Recovered
New Roofing $7,600 $8,000 105 percent
Insulation Upgrade $2,100 $2,000 95 percent
Wood Flooring $5,500 $5,000 91 percent
Vinyl Windows $15,000 $12,000 80 percent
Kitchen Renovation $60,000 $40,000 67 percent
Bathroom Renovation $26,000 $15,000 58 percent

Data sourced from National Association of Realtors.

These numbers can be staggering when thinking about the investment in time and money that renovations require. It’s clear that certain renovations may not deliver the added value you might anticipate at the outset. Don’t waste time getting frustrated. Get smart.

[See: 10 Unorthodox Ways Your Real Estate Agent May Market Your Home.]

In order to get the most of your investment, it’s important to do your homework. Make sure you truly understand your market so you can take the right action to meet neighborhood standards, get the home occupied quickly and charge the right rent so your investment can pay off.

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Not All Dollars Are Spent Wisely: How to Avoid Overspending on Renovations originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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