Rental Property Renovations and Improvements That Pay Off

If you’re looking to get a major renovation project to pay off in terms of the immediate resale value of your rental property, you’ll probably be disappointed. Return on investment by project varies for individual rental properties, of course, but a series of annual studies by Remodeling magazine indicate that even the odds of simply breaking even are very much against you.

ROI for Single Family Rental Housing Renovations

Renovations and improvements that actually pay off for rental real estate ownersRenovation and improvement projects tend to not add enough resale value to rental properties to justify their immediate cost. Indeed, almost all the projects for single family homes listed in Remodeling magazine’s 2015 Cost vs. Value Report are net losers.

Here are the average returns on investment for renovation and improvement projects on midrange single family rental homes:

  • Add a deck – recoup an average of 80 cents on the dollar
  • Minor kitchen remodel – recoup an average of 79 cents on the dollar
  • Add an attic bedroom – recoup an average of 77 cents on the dollar
  • Remodel the basement – recoup an average of 73 cents on the dollar
  • Add a master suite – recoup an average of 62 cents on the dollar
  • Home office remodel – recoup an average of 50 cents on the dollar

Renovations on upscale homes yield similar returns on investment, according to Remodeling. The Cost vs. Value Report findings have been fairly consistent for years in that almost every remodeling project for single family homes is a net money loser if it’s undertaken for an immediate resale.

In 2015, only one project, adding a steel entry door, broke even on average. In past years, you could break even simply by installing a nice, new garage door.

It’s vital to note that these ROI calculations use only the comparatively narrow criteria of a real estate flipper. The reason most rental property owners make these renovations isn’t for personal profit, but for personal enjoyment – and that enjoyment has value in itself.

ROI for Multifamily Rental Housing Renovations

The editors of Multifamily Executive magazine, a publication aimed at apartment building owners and developers, recently looked at the renovation and improvement projects from the perspective of the rental property investor. After all, multifamily rental real estate owners don’t benefit personally from renovations – they only benefit if the property becomes more rentable, with a lower vacancy rate, higher price point and/or is able to attract a better class of renter.

Skilled and rational rental property owners tend to expect somewhere between a 10 to 30 percent return on their investments when it comes to renovation projects. Nationwide data is tough to come by for multifamily rental housing renovations, but Multifamily Executive reports that some of the top ROI generators include:

  • Wood floors
  • Kitchen upgrades
  • Improved interior lighting

Pro tip: Remodels and rehabs don’t last forever. If you spend $5,000 to upgrade your rental property’s kitchen appliances so you can get an additional $50 per month in rent, you’ll meet a 10 percent ROI hurdle and then some. You’ll also have a higher base for future rent increases. However, you’ll eventually have to spend more money to replace those appliances all over again. Take gradual wear and tear and the need for replacement or upgrading into account when making ROI calculations.

Remember the Time Value of Money!

Learn how to increase your rental income - work with a professional property manager!When calculating break-even points on rental property renovation and improvement projects, keep your target ROI, or “hurdle rate,” and the time value of money in mind.

After all, any rental real estate owner with an extra couple thousand dollars to spare has a million other investment opportunities available to them beyond making improvements and renovations to their properties. It’s therefore essential to keep the opportunity cost of any project in mind; you need to get a substantial projected ROI on any renovation or improvement project to make it worthwhile.

On the other hand, if you fail to make needed repairs, your rental property could go unrented for extended lengths of time as prospective renters choose to lease other, more modernized and well-maintained housing options. This would also have a severe detrimental impact on your rental income.

Here’s the bottom line on rental property renovation and improvement projects: be very careful when committing substantial amounts of money to any project, even ones that conventional wisdom would have you believe are slam dunks. Don’t remodel just for the sake of remodeling, as doing so may end up costing you considerably more than the extra rental income that you’ll earn!

Pro tip: if all of this talk about renovating rental housing, “break even points,” “returns on investment” and “opportunity costs” is giving you a headache, it’s likely that you’ll benefit from the help of a property management company.

Professional property managers can assist with every aspect of managing rental real estate that you despise, from handling tenant disputes and non-payment of rent, being available 24/7 for emergencies of all sorts, providing insight on landlord-tenant law and, of course, facilitating everything from routine maintenance to major renovation projects.

Click the below button to get a free, no-commitment quote from a professional property manager and learn how they can make owning rental real estate less stressful and time consuming.

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Know Your Association’s Governing Documents and Their Hierarchy

In a perfect world, every homeowner or condominium association’s bylaws, CC&Rs and other governing documents would be crafted by lawyers so that they are fully in compliance with municipal, county, state and federal laws and do not contradict one another.

Know your association's governing documents and their hierarchy In the real world, this can never be the case. Occasionally, there are areas of conflict between various association governing documents and the law, or amendments that are made to one document without the necessary changes being made to the others so that everything is brought into alignment. For example, a dispute can arise when a resident points to a passage in the association rules and regulations that allows them to do something while the CC&Rs contain conflicting information.

When both parties can point to language in different documents that justifies their actions or non-actions, how can such differences be resolved? Is there an established order for which document takes precedence?

It turns out there is such an order of precedence, at least in most areas. Just as the Constitution trumps federal laws, and federal laws take precedence over state laws and so on, there is a similar order of precedence, or hierarchy, of documents when it comes to homeowners associations and condominiums.

Specifics vary by state but, in general, the hierarchy of documents looks something like this:

  1. City, county, state or federal laws. The higher the level, the greater the precedence. In some cases, laws may be written in such a way that various association governing documents are deferred to.
  2. Recorded plat, map or plan that is documented in the county recorder’s office. These plans help designate ownership plots and the geographical limits of the association’s jurisdiction.
  3. CC&Rs (or a declaration of condominium for COAs).
  4. Supplementary declarations.
  5. Articles of incorporation or corporate charter (if any exist).
  6. Bylaws.
  7. Rules and regulations.
  8. General resolutions.

This is the specific hierarchy of governing documents in California, under the Davis Sterling Act:

  • To the extent of any conflict between the governing documents and the law, the law shall prevail.
  • To the extent of any conflict between the articles of incorporation and the declaration, the declaration shall prevail.
  • To the extent of any conflict between the bylaws and the articles of incorporation or declaration, the articles of incorporation or declaration shall prevail.
  • To the extent of any conflict between the operating rules and the bylaws, articles of incorporation, or declaration, the bylaws, articles of incorporation, or declaration shall prevail.

Most if not all states impose similar governing document hierarchies.

Likewise, the hierarchy of governing documents also restricts the authority of association boards to infringe on the liberty of the owners, except within certain parameters defined by the law, the declaration and the CC&Rs. For example, except within very narrowly defined contexts, association boards cannot create a rule or regulation that infringes upon First Amendment rights, except where homeowners have ceded them.

Things get a little fuzzy when it comes to state laws that pass after the homeowner or condominium association documents were drafted. After all, the Constitution doesn’t allow state governments to shred existing contracts by force of law. Florida attorneys Gary and Ryan Poliakoff explain which takes precedence:

[It] depends on whether the statutory amendments are procedural (affecting simply how laws are carried out) or substantive (an actual change to rights or regulations). The Constitution prohibits states from passing laws that impair existing contract rights. So, for example, one could debate whether a state law that prohibits an association from restricting leasing of units would be applicable. If the no-leasing provision was in the declaration before the legislature passed its law, then the change is arguably an impairment of contract (with the contract being the actual declaration of condominium).

Some documents contain language that affirms that they are automatically modified by all legislative amendments. Lawyers refer to such clauses as “Kaufman” language, after the case that stated that if such a provision is contained within the document, then legislative changes do not impair the existing documents because applying these changes is strictly an interpretation of the document.

One important rule of thumb for governing documents: In general, whichever document gets recorded first is the one that usually governs. So, below the law, the top document in the hierarchy is the plat the developer files in the county recorders’ office defining the geographical limits of the development. The declaration usually comes after that. Once a homeowner or condominium association declares its existence, they usually go on to file as a corporation or other entity, and then go on to develop CC&Rs and bylaws, and so on down the chain.

Understanding the hierarchy of governing documents can help avoid or settle costly litigation and predict how a court may rule. This, in turn, can save associations and their members thousands of dollars in court fees.

Say what you will about lawyers, but practicing law – and even simply understanding legalese – is exceedingly tough. Unless you have a board member with some training or understanding of the applicable laws, how can your association expect to safely navigate through complicated legal situations like those presented by issues related to conflicting association governing documents?

There’s one simple solution available to homeowner and condominium associations in need of legal advisors – work with association management companies! In addition to providing better financial management, dues collection and governance, professional association managers help their clients comply with federal, state and local laws and avoid costly litigation.

Click the below button to get free, no-commitment quotes from association management companies in your area and learn how they can serve as your legal advisor, dues wrangler, maintenance mogul and more. Get a free quote from a professional association manager!

3 HOA Horror Stories – Don’t Let These Happen to You!

We try to keep abreast of news related to homeowner and condominium associations so as to stay current with the topics and issues association board members like yourself should be aware of. In the course of our daily headline skimming, we’ve noticed a disheartening trend: almost all association-related articles are extraordinarily negative in tone.

Here are three HOA horror story-related articles that have been published in the last week alone:

Orange Park, FL

HOA horror stories - don't let these happen to you!“It’s a dictatorship,” one resident of the Spencer’s Plantation neighborhood said of its HOA board, which stands accused of illegally ignoring a unanimous recall vote and leveling absurdly large fines up to four times the size of annual dues for minor infractions like having a leaning mailbox.

Litigation or binding arbitration seems inevitable, especially since one homeowner has already received a restraining order against a board member.

Carlsbad, CA

An HOA board was forced into damage control mode when the manager of a unit turned into a vacation rental kicked a family out after lying that a series of complaints had been lodged against them, thereby ruining their “once-in-a-lifetime summer vacation.” The HOA board felt compelled to reach out to a local news station once the station opened an investigation based on the family’s experiences to side with and apologize to the family.

Ruskin, FL

Complaints from several surly residents of a gated community prompted its HOA board to shut down an 11-year-old boy’s lemonade stand. The pint-sized business, started with funds from the boy’s own pocket, only lasted two hours before being forcibly shuttered. “Sometimes I think they just go a little bit too far,” the boy’s father said of the HOA board. “I would hope that something as innocent as that could be overlooked at least for a day.”

The conclusion to draw from these horror stories is simple: managing an association is hard work, and there is plenty of room for conflicts to arise and abuses of power to occur. Even a competent and ethical association board member like yourself can be drawn into time-consuming and headache-inducing conflicts as a result of this fact.

This is one of the primary reasons approximately 75 percent of homeowner and condominium associations are managed by association management companies. The average professional association manager is an infinitely more talented conflict resolver, legal advisor and financial manager than the average elected association board member.

To avoid inadvertently inviting nasty articles to be written about your community – and, more simply, to save time and avoid stress – click the below button to get free quotes from local association management companies and learn what they can do for you.

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