The one about home improvement
Decorating and renovating are real fun to think and write about. And yes, we threw in TikTok because ... Gen Z
Chances are you have spent A LOT of time staring at your own four walls over the last year and a half. Even if you have the distinct pleasure of calling New Zealand your home - a country not only beloved for its Lord of the Rings-certified natural beauty but also pretty officially Corona-free for a long time - even there you would have had to endure Covid-induced lockdowns by now. So I sincerely hope they are nice walls?! And that you maybe even found it in you to overcome the inertia for a hot minute and repaint / redecorate / resomething, given that going up pretty walls is more fun than … nevermind, you get the idea.
Anywayyyyyy …. Not here to write yet another think piece about the changes the pandemic has brought upon us. Sourdough, banana bread, blablabla. At the same time I can’t help but be slightly fascinated with its impact on how people seem to think about their home and hygiene … Covid-vary Europeans want in on the Japanese robo-toilet! If that doesn’t tell you that something has shifted in a big way … then I don’t know what will. Another bit of content that I have spent more time on than I’d like to admit: the deep cleaning trend on TikTok, courtesy of the Pandemic, brought to light by the always fabulous New York Times. Hell yes to a bubbling cocktail of baking soda and cushion dirt in your bathtub!
So whether you are like me, reading about something that in the end seems like too much hard work to actually do it - or whether you are actually looking to renovate and spruce up your real estate - let’s get to it: The dummies guide to rental property home improvement (too silly a title to actually make it the title).
Great question to start with! Have we ever had a thing where my basic advice was “it depends”? Yeah, thought so. This is that again. Basically, if you buy a ruin, OF COURSE you’ll have to do something right away to make your gem, well, gem-like. Or rentable at the very least. Which brings us dangerously close to the topic of “fix and flip'' which I am very keen to hold for a whole ‘nother time, though.
But seriously, the biggest advice would probably be to pump your breaks a little, especially if you have bought something that’s rented out already. If there are no complaints and tenants are paying their rent there is nothing pressing to do. Two reasons: a) it will be so much easier to do anything once there’s tenant turnover, meaning the apt is empty anyway. But also b) if it ain’t broke - don’t fix it! We talked about the general rule of thumb for renovation reserves here and chances are you will have to tap into them soon enough. Bigger repairs can get costly - so any month you don’t spend money on fixing something is a good month, allowing you to build up bigger savings.
As for us, we did the first renovation (a bathroom, new flooring and a paint job) when a tenant moved out in 2016 - meaning we went a full 2.5 years without any bigger investments. And yes, there’s a method to this madness: We talked about “anschaffungsnaher Aufwand” here and this is that principle in action. You buy something with as positive a return as possible for year one and don’t spend more than 15% of the purchasing price on renovations in the first three years to catch a nice little tax break. Voilà.
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Of course, the wonderful answer of “it depends” totally applies here as well. In our experience, though, there are three main categories of renovation that will come your way if you own an investment property. These can either be repairs because something that has worked in the past isn’t anymore, structural additions to your building (the often very ugly kinda “glued to the side of the building” steel balconies fall into this bucket) or simply upgrades to existing infrastructure, improving the functionality and/or aesthetics of something that has already been there. In order of importance (and probably also cost):
Necessary: Per the above, if it ain’t broken you don’t need to fix it. But if it is? You absolutely have to. Consider these the things that you have to take care of (and quickly) not only because your tenants' comfort and safety depend on it but because it will affect your property value in a big way if you don’t. Think roof, general plumbing, the heating system
Functional: Even if things aren’t broken, there might be an upside to updating your property in a way that increases or improves functionality. For us, this has mainly been kitchens and bathrooms in individual apartments. Ranging from something as big as the addition of an elevator to as small as a communal laundry basement - these additions will likely also increase your property value in a significant way
Aesthetic: While updated bathrooms and kitchens definitely came with added functionality for tenants, I would argue that the aesthetic upgrade plays almost as big a role in being able to increase your property value through renovations. Another classic with high reward: a fresh coat of paint!
In seven years of owning our house in Hamburg, we were lucky to not have to do major “first category” work. I credit this to asking the right questions when we made our purchasing decision (when has the heating system been installed, what’s the last thing that was done to the roofing, etc), doing a solid appraisal as well as luck. We have, however, for a combination of functional and aesthetic reasons done three bathrooms and two kitchens, allowing us to gradually increase rents within the regulatory corridor.
While we are on the basics of journalistic questioning - the who? clearly is important but probably the hardest to answer. How are we going to tell you who is going to tile your bathrooms? Still, a few thoughts:
It’s relatively common especially in older German apartment blocks to have a Hausmeister (a janitor / warden type role) living in the building. While their job more often than not is the day to day upkeep of the property, they can be a good start to source builders and handymen for all types of renovating actions (which is also what happened in our case)
If you are working with a property management company instead, they also could be your go-to “where do I start with this?” call. They’ll have experience and might be able to recommend different trades
Opinions on this are very divided (haha, sign of our times perhaps?) but myhammer, an auction platform where builders can outbid themselves to compete for posted renovation projects, is an easy way to start researching prices and get some names. There’s obviously a morality question to this kind of price dumping and I would argue that the lowest possible price might be more a sign of desperation than quality … but that’s for everyone to navigate individually
Speaking off: Fully realise you have to start somewhere, but the goal should be to build up a trusted network of specialists that you can tap into whenever needed. Chances are you will be doing something pretty regularly and having subcontractors that you know and trust will be a game changer. Don’t know anyone in the trade? What about architects? If you happen to have those in your circle of contacts, they might also be able to get you off to the races
Last but not least, this is probably the most important question - and could also be aptly titled WHY? After all, the whole reason you are doing renovations is to preserve and possibly heighten the value of your property as well as increase rents. Ergo, you renovate for a return. Brace yourself for some numbers talk:
When we renovated, we definitely did not include any marble countertops or Brazilian oak flooring - instead, I would call it “solid mid-range”. Spaces were professionally renovated in a modern but inoffensive style without being over the top in any way. For that, we spent between 6,500 and 8,000 Euro on each bathroom (and they aren’t big rooms by any stretch of the imagination) and between 2,900 and 3,100 Euro on kitchens
The above numbers seem to be in line with rules of thumb that you will find googling - which give you a range that centers around 600 Euro per square meter for a solid renovation and up to 1,200 Euro if you are doing a much more in-depth redevelopment
While you have to assume that labour costs will make up 50% of your overall reno costs - it’s not entirely realistic to expect and slash that even if you were the most talented handyman or -woman in the world. Accounting for tools you would need and less favourable conditions on materials, you could probably cut costs by around 30% if you were to swing that paintbrush on your own, though. May we suggest a playlist to accompany your efforts?! It’s not one of the painting specific ones, though, which Spotify announced to “have doubled during the pandemic”
Buried deep down in the bottom of this also a number that might be pretty interesting - consider it a reward for making it this far I guess? With renovations of three apartments and a 10,000 Euro investment into the stairwell we were able to increase rent to 10.30 Euro a square meter on average (up from 7.60 Euro) which increased the overall investment return from 6% to 9%. Just if you needed any more proof that renovations can greatly increase your lever
With the main questions answered - let me leave you with two additional thoughts:
I mentioned the appraisal we did as part of the pre-purchase due diligence above. Its importance can’t be overstated, so here we go again: Not only is it the smart and safe thing to do (I mean, your pretend real estate knowledge got you this far but now, please, step aside for the pro!) - it also served two other purposes: We used the appraiser’s assessment to negotiate our final purchasing price which becomes a lot easier and much more convincing if there’s a factual base (“someone who knows his stuff said this is broken and it will cost xx to fix it so we are deducting half of that from our offering price”). But we also had a pretty clear sense if and what had to be done in terms of renovations and what it would cost. Boom
Secondly, I think there’s a real (psychological) hurdle when it comes to renovating and updating. I get it. It’s daunting. But there’s a real upside financially, especially BECAUSE people don’t dare take on a project. We certainly have seen the effects in action and might be ready to tackle more of that. Stay tuned!
Next time, on Rente aus Stein: the one thing you need to keep in mind if you are planning to build out a real estate portfolio and don't want to be screwed on the financials.
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We are not lawyers (sadly) and as such can’t give you legal and/or tax advice. We are simply telling our story in the hope that it’s inspiring to you.