Rentals are not about getting tenants emotionally excited about living at your property. They are instead designed to ensure that your property is a suitable living situation for multiple tenants over the long term. Therefore, if you are investing in fancy upgrades instead of the simple, yet function options, you're taking a huge risk.
Here are the risks of over-improvement and why you should avoid it.
Lower ROI
This one seems obvious. However, you might not notice the damage to your finances until it's too late. If you over-improve your property, it lowers your ROI in the short-term and your payback period will also be longer. Essentially, over-improvement means that you are making your business less efficient because it takes you longer to get your money back.
No Chance of a Refi
Let's say that your renovation plan involves making $45,000 in renovations on a house that you bought for $60,000. After spending so much on renovations, the house looks amazing and it's one of the nicest in the entire neighborhood. You manage to find a tenant who is willing to give you $50 more a month than the market rate immediately.
Then you get an appraisal and find out that the upgraded house is only worth $85,000. While you've created equity in the home, if your lender says that you're only able to borrow 75 percent of the $85,000, you'll only have a loan of around $64,000 available to you.
That means you've just spend thousands on upgrades and are now only working with an extra $50 a month for all of the renovations that you've put into the house. When you do the math, it simply doesn't make sense to spend that much on renovations.
High Costs of Repairs
You made some nice upgrades to your rental and your tenants love it. However, the more you add, the more your tenants expect. That means the more money you will have to spend on keeping it nice. Your tenants will cause regular wear and tear to your property and may even cause damage. Now you're on the hook for costly repairs that wouldn't have cost as much if you hadn't opted for those high-end upgrades.
Stop Falling in Love With Your Rentals
The easiest solution to avoiding the headaches that come along with over-improvement? Stop falling in love with your rentals. The more you see your property purchase as just that and not a place that you would love to live, the easier it will be to stop adding upgrades that you secretly actually want for yourself.
Keep in mind as well that your tenants don't actually care about your property. Even the most well-behaved tenants won't feel the same attachment to the property you feel when it comes time to making repairs.
So when it comes to improvements, keep things simple and functional and avoid upgrades with all of the bells and whistles.