High-ROI “Value-Add” Renovations for Any Budget ($5K – $50K+)

Which rental renovationsI want to buy a rental property, but the numbers just don’t seem to work. But what if I could actually change the numbers? It’s actually possible you do have options. There are things you can do right now to increase your property’s value, generate higher rents, and turn bad investments into good ones. Keep listening to find out how. Hey everyone, Dave here. I’m the head of real estate investing at BiggerPockets, where we teach you how to achieve financial freedom through real estate. Today we’re talking about value add actions you can take as an investor to make your property more valuable. This can be as quick and easy as adding an accent wall, or you can do some moderate renovations to add in extra bedrooms, or you could scale all the way up to a full gut renovation today to help me talk about what value adds are actually worth it and we’ll deliver an ROI for you. I have Henry Washington with me. Henry’s been doing value add projects basically since the start of his investing career. So he’s going to tell us which upgrades are actually worth it and how to identify which properties are good candidates for adding value before you actually go and buy them. Henry is also going to tell us one of the conventional much talked about value add ideas that’s actually not worth it, and one that he’s stopped using on his own deals. So make sure to stick around to hear that. Henry. What’s up man?What’s up buddy? This is in my wheelhouse. I’m excited to talk about it.Have you always been a value add investor?Absolutely.Your first deal, were you already doing renovations and adding value?Yeah, my first deal, we added value simply by charging market rents, which is one way you can add value, right? Yes. If they’re under rented for their current status, you can do that. But yes, and then after that tenant, we did renovate that property, so we’ve been adding value since day one.Why did you choose this strategy of buying things that aren’t necessarily up to their highest and best use and then adding the value yourself rather than buying something that’s stabilized and just ready to go?Well, because it’s called real estate investing and investing is the key word, right? Because if you’re investing in anything, what’s the basic principle, right? The principle is to buy low, sell high, right? Buy to discount, then monetize at the higher value. And when I started researching how do you buy at a discount in real estate, it’s always synonymous with buying some level of distress. So that’s how I got into it and then fell in love with it.That makes total sense. It’s such a great way to make money. I admit I, I’m a reluctant value add investor. I always want to buy things that are just ready to go, even if that means there are less returns. I’ve done plenty of cosmetic rehabs, I’ve done burrs. I am learning how to flip now, but for a long time I felt at least when I got started in 2010 and when I was buying properties last decade, it was kind of easy to just buy something that was not super complicated and a lot of times the value add that I would do was just kind of a cherry on top. It wasn’t necessary for any of my deals to pencil out, but I am trying to learn more and be a bit more aggressive about value add. And so I’m hoping to pick your brain a little bit more about this day, and I think everyone listening will learn a little bit from Henry about where to focus your time, your money, your energy within the really broad spectrum of things that fall into the value add bucket.Let’s do it.Alright, cool. So I want to start with just easy stuff. Let’s talk about low cost, easy things. If I wanted to buy something and put five grand into a property, let’s call it a rental property, not a flip, you’re not flipping a house for five grand, where’s the bang for my buck going to come?Yeah. When I think about adding value, I think there’s a couple of buckets. So adding value can be where you’re doing something that truly increases the value, like the work that you do will have a direct impact on the value of the property. So that’s thinking of things like adding square footage because now your cost per square foot is higher. That’s things like adding bedrooms, bathrooms, those things have a direct impact on the value of the house, but there are also things that may not have a direct impact on the value that may be an indirect impact on the value, and I like to call those upgrades perceived value. You can add perceived value to your property. So for $5,000, things that you want to think about as a rental property are, what can I do that can make my property stand out from the competition?
So you don’t want to just go into this blindly and start doing things in your property. You want to look at what are the competing rentals in my market in this neighborhood, and what features do they have and not have so that you can add. And so for that $5,000 price point, think about things like, can I add nicer countertops? Can I add kitchen back splashes? Can I take a bathroom and take the plastic insert out and do tile to the ceiling around that? All of these things don’t necessarily add direct value, but they add perceived value. They add wow factor. One of the most inexpensive things that we do that helps us get better tenants at higher rents is doing feature walls. So we like to take a room in the living room and use just a different paint color and some trim to create geometric designs, and that feature wall didn’t increase the value any, but when people walk in and see it, they go, Ooh, right? They go, I want to live here. I might be willing to pay a little more to live here than the place down the street because I don’t have any of these features there.
And so now I get a higher rent and I get somebody who has some ownership in that property. They’re proud of it, they’re proud to live there, they want to show their friends, and so now they’re paying a different amount of rent. And so I would say the best ways for under $5,000 that we add value to rental properties is we do countertops, backsplashes, tile, tub surrounds, and feature walls. You can probably do all of those things in a property for under five grand.So what you’re saying is direct value add is changing the functionality of the house. You’re adding something that is measurable, another bathroom, taking it from a half bath to a full bath or finishing out a basement and adding a bathroom. That really changes Who’s going to rent that, right? If you’re going from a two bath through a three bath, maybe you’re attracting more families or bigger families or that sort of thing. The other stuff, like you said, it’s perceived value, but it’s design, it’s desirability, it’s not actually functional, it’s just people like it.Now before we move on, you can sometimes add direct value for under five grand if your property is set up for you to do so.Yes.An example of this that we did recently, this was in a flip, but could have been a rental, right? And so what happened was we had a two bed, one bath house and that one bath house had a laundry room, and that laundry room was very big, big enough that it could have been a small bedroom. This house also had a sunroom. Now this sunroom was not heated and cooled and was dilapidated, and so what we were able to do was to move the laundry into the sunroom. We finished the sunroom by just putting insulation in the walls and drywalling the ceiling. It was just kind of like an open beam ceiling. We added insulation and drywall in the ceiling. We painted the concrete floor, we moved the laundry in there, and then we added a mini split air conditioning unit into that sunroom. So by doing that, we were able to spend probably about five grand, and so we added square footage even though it was already under roof, that square footage wasn’t counted in the heated and cooled square footage of the house because there was no air conditioning. So by adding a mini split, we added about 200 square feet to the house, and by moving the laundry into that room, we were able to create a third bedroom, and so that $5,000 allowed us to sell this house for $220,000 instead of $200,000. So I spent five and I sold it for an extra 20. So that’s $15,000 worth of additional value for spending 5,000And not that much work that much, not even not much time.So if you have a property, if you’re listening to this and you have a property and you’re considering doing something like this, do you have a room in that property that is not under roof? Do you have a room in that property that could be a bedroom instead of a dining room? Right? People don’t really use formal dining rooms. I like to convert those to bedrooms.I just did that in a property the other day. There was a front little thing. I just put a door up. It costs like $600. I’m getting probably 2, 2 50 more a month in rent because of that.Boom, can you convert a garage? A lot of the times, single car garages, people don’t use to park in. They use to store stuff. I have a couple units in Joplin, Missouri where they’re single car garages and when I bought the properties, every single one of the garages was stored stuff. No one was parking in it. So we spend about five grand convert the garage into a bedroom, and now we get an extra three to $500 a month of rent out of each one of those units.This is really sort of the best advice because I think it’s important for people to realize that this isn’t luck. It’s not like Henry bought this house and was like, oh, I found this sunroom and I can convert it. This is the stuff you need to be looking for when you’re actually going to buy properties because anyone can theoretically add a bedroom, but if you’re popping a top and taking off a roof and rebuilding that, that’s going to be a very expensive proposition that’s going to take a long time, or you can find these properties that are set up for it. Those are good examples. I did something very similar with my short-term rental. I wanted a four bedroom house. I needed that to get my revenue. All of them were super expensive, but I found a three bedroom house that had a 400 square foot second living room. No one was using it, and it’s in a walkout, but it already had an egress window built, so I didn’t even have to do that. It had a closet. It was basically all I needed to do is put up drywall, another bedroom, especially if you’re new to value add, these are the kinds of properties that you can really start to target. The other thing where I invest a lot of places at basements and finishing them out is kind of a no-brainer. You look for ones that have the right ceiling height,
That have a good foundation, that have big enough windows for egress, like you don’t want to dig out the foundation, but those types of things, that’s just really easy types of value add that really have a tangible, measurable, proven way of adding value.Can I give people a list of what to look for when they’re shopping for properties like this?You absolutely can and must, but first we need to take a quick break. We’ll be right back. We are back on the BiggerPockets podcast and right before we left, Henry teased us with some shopping list that he’s going to share with all of us about what to look for when adding value. So Henry, take it away.One of the first things you want to look for are look for homes that have bedroom and bathroom counts where the square footage seems too big for that bedroom and bathroom.Yes. Yeah, like a 2,400 square foot with two beds.Yes,Exactly. That’s not right.If you’ve got over 2000 square feet, two bedroom house, there is room to convert something to a bedroom, there is room to add some value. If you’re looking at a three bed, two bath house and it’s got 2,500 to 3,500 square feet, there’s probably room look for properties that have sunrooms. Sunrooms typically are not heated and cooled, and you can easily add some drywall and add some flooring and add some insulation and a mini split air conditioning unit and you can get added square footage.No, sorry, I’m just laughing. This is just bringing up my childhood. My dad did this where he converted a sunroom to my bedroom. I just think he skipped the insulation and adding heat part because it was just freezing my entire life, and this was in New York. I was just always cold. There was never heat. I think he might’ve missed that criticalStudy. Yes. Yes. Sunrooms, we have made a lot of money by converting sunrooms to heated and cooled square footage, and they’re easy properties to find. It’s typically called out on the MLS listings that they have those features, and so you can literally search for them. A lot of them are not heated and cooled, and yes, you can look for properties with basement units and Dave is absolutely right. When you’re looking at properties with basements, you want to make sure you check that ceiling height and check the egress size of the windows because you want to be able to legally get somebody in and out of that window in the case of an emergency for it to be counted as an actual bedroom. And then you can also look at properties with single car garages because properties with single car garages give you the option. You can convert those single car garages to bedrooms, but when you’re looking for that, you want to make sure you check the competing properties in that neighborhood. You don’t want to be the only house with a converted garage. You want to make sure that that is something that is happening within the neighborhood because if you’re the only one, then your desirability goes down.My personal favorite these days that I’ve been looking for, and I’ve done this in the past too, is I love a basement that is the ceiling height that has a separate entry.Oh, yeah, absolutely.Especially now with all the up zoning that’s going on in areas you could turn places into second units, check the zoning, but the upside of adding a whole nother unit is just enormous. And yeah, we’ve sort of gone on a tangent here. We started with five grand, now we’re just talking about the best value. That’s 30 grand, 40 grand, something like that, but a whole unit. I mean that’s going to pay for itself in a year or two. That’s an incredible return on your investment, so that’s something I definitely look for. Same thing as an attic too. Similar to a basement, if you find an attic that is not going to be sweltering hot and the roof lines aren’t superWeird, for it to be inexpensive, you have to have access to that attic in a way that’s not weird, meaning you got some normal sized stairs to get up to that attic and you don’t have to build out a stairwell. That can be expensive, especially if you have to do it to code, and you don’t have to dormer out any part of that attic. But I took a tour of a house yesterday that had an attic space that was ripe to just finish off fairly easily. Didn’t need any dormers, didn’t need to move any electrical or plumbing. It was just wide open space and it had easy access. So there are opportunities to do it.I’m enjoying this conversation because I feel like it really resonates and sort of speaks to this rant I’ve been on for two months now about trying to find deals that are solid today and adding upside. This is just all upside, right? If you can find a deal that’s even decent that has any of these characteristics, you’re going to be able to turn this into a really good deal. Even if on paper, even if you just look at Zillow, it’s probably not going to look that great. These are things that you’re going to have to go identify yourself. Go through the checklist that Henry just said. Tell your agent that this is what you’re lookingFor. AbsolutelySay, find me a 2,500 square foot place that has two or three bedrooms and I’m going to add more. These are things that they can put into the MLS. This is a buy box that is very feasible, that is very achievable. You just need to identify which value add projects you are comfortable taking on, and then just go pursue them because these deals are out there right now.Absolutely out there. We find them all the time.Before we move on, I thought of one other less expensive value add that’s made me a ton of money, particularly in Denver, is fencing in a yardBecauseSo many people have dogs and kids and they want their yard fenced in. This is a low cost thing that people will pay money for and they’re not going to do it themselves. So fencing in a yard is another really good one for driving up rents. But before we move on, are there any under 5,000, under $10,000 value adds that aren’t worth it that you’ve done and say, actually that didn’t give me an ROI at all.Things that I have not gotten an ROI on are supplying my own appliances like washers and dryers. I found that cost me more money than it made meReally even on a rental or is that on a flipOn a rental?Really?Yes. What I’ve learned is it is best to provide the functionality but not to provide the actual appliances.So people buy their own washer dryer.Absolutely. It was my property manager who actually had to pull a report to show me that it was more cost effective to provide the place for them, but to not provide them. I’ve saved so much money by now no longer supplying the washer and dryers. A lot of the times people would want to bring their own, and so I’ve spent the money and then I’m having to put these in a storage unit somewhere, but most of the time it’s just mainten and replacing these units so much. They’re just so expensive.I wonder if people also just take better care of them when it’s there.Yeah, that’s probably very, very true.That’s a really interesting one. Let’s move on to some more expensive ones. So let’s say if you’re willing to buy something that’s got a little hair on it, maybe you’re going to spend, I don’t know, 25 to 50 grand. What are some things in addition to adding bedrooms that you would consider doing?Yeah, I mean, this is the old tried and true. If you’re going to spend 25 to 50 grand, you want to make sure that a chunk of that is being spent on kitchens and bathrooms. That is important. So if you are buying a house that only has one bathroom and you’ve got that kind of a budget, you need to see if there is a place for you to add a second bathroom. Some of the ways that we have added a bathroom inexpensively, I have at least 10 times now, have converted laundry rooms to bathrooms with the laundry in it.Yes, because the plumbing’s already there, right?The plumbing is already there. Bonus if it’s on a crawl space because then it’s really inexpensive to do because you can access the plumbing very easily, and so two bedroom, three bedroom, one bath with a laundry room, you can typically fairly easily turn that laundry room into a bathroom by adding a toilet and a tub shower and a small vanity, and then what we typically do is take that laundry and make it to where a stackable fits better so that it saves on the space. We have done this several times in flips and rental properties because that additional bathroom adds so much value and it increases the amount of people who want to live in that home because there is more than one bathroom and they could care less that their laundry is in there. What they care about is they’ve got an extra toilet and an extra shower.I want to talk to you more about kitchens because I’ve heard some conflicting opinions about renovating kitchens. We do have to take a quick break though. We’ll be right back. Hey, everyone. We’re back on the BiggerPockets podcast talking to value add. Before we left, I wanted to ask Henry about kitchens. So Henry, I hear conflicting things here because in my experience, renovating kitchens drives rental value. I don’t know about long-term resale value, but renters want a nice kitchen. Most people I’ve also heard though, if you own a home at your primary residence and you’re going to list it for sale, I’ve heard that you specifically shouldn’t renovate kitchens. I’ve heard that it doesn’t actually offer an ROI because people wind up wanting to renovate it themselves and your chances of renovating in the way that they like is low. I don’t know. I’ve heard both, so I am curious what your opinion on kitchens is.I think people have grandiose ideas about renovating properties themselves, but they’re never really going to do it.That’s probably true. Yeah,So no, I am the opposite. We are going to renovate the kitchen nine times out of 10. Now, the level of renovation will depend on the neighborhood and the comps, but we are almost always going to renovate the kitchen and they’re not as expensive to renovate as people think. I think people really get caught up in doing grandiose kitchen renovations, meaning they want to move it from one side of the house to the other, or they want to do all new cabinets and build out a butler’s pantry.They need the pot filler. You got to have the pot filler.Oh, gosh, yes. Got to have a pot filler. If you stay within the footprint that’s existing, if you can, it can be a very almost inexpensive upgrade. That adds value because if you stay in the existing footprint, a lot of the times you do not have to replace the cabinets, and that’s the most expensive part is coming in and getting a whole new design with all new cabinets. Now, there are some situations when you need to replace the cabinets. Sometimes you buy a house and you’ve got the cheap particle board cabinets. It doesn’t make sense to paint those, but a lot of the times if you’re buying value add, you’re buying an older home, they’ve got solid wood cabinets. The cabinets they had back then are better than the cabinets that they build brand new now.Totally. They’reJust solid wood cabinets, and so a lot of the times I find that if we just paint or stain the cabinets, put new hardware on them, new modern hardware on them, and you can even get new modern, soft close hinges and make your old cabinets function like new cabinets. People honestly don’t care. They look great. And even if you’re hard up on wanting to do something new and you don’t like, maybe the doors are old or maybe some of the doors are missing, you can just replace the doors and keep the boxes. I’m doing that right now in a kitchen on a flip. New cabinets for this house would’ve run us between seven and $10,000 because it’s a big kitchen. I’m replacing all the doors for $2,200 and it’s going to look brand new. So if you can save your money on your renovation because you’re not changing the layout, then you can remodel the kitchen fairly inexpensively by painting the cabinets, getting a backsplash.
What’s really cool about backsplashes is if you have a smaller kitchen, you can get a really high-end expensive backsplash tile because you’ve got a small square footage of backsplash to put it in so you can spend more money on a fancy backsplash tile and get the oos and S because you’re not putting it in a lot of places. Now, if you’ve got a ton of backsplash, then you’re going to have to back off a little bit on that and pay more attention to the design, and then countertops. Between those three upgrades, you can completely overhaul a kitchen and blow your competition out of the water and really does add value because people want nice kitchens and nice bathrooms.Totally.Bedrooms are bedrooms, it’s floors and paint in a window, but kitchens and bathrooms, that’s where you wow people. That’s where you make your money.Totally. I mean, when I go into a house, I look at the kitchen first. I about you for a living too. I like to cook. You like to entertain. This is where people spend time with their familyUntil you hang out.Yeah, it matters. And so every time I think I’ve renovated a kitchen, it’s been beneficial and it’s paid off for sure. Alright, before we get out of here, I want to just talk about the big, big stuff because all this stuff is super practical stuff that you can do. I am not a fancy value add guy. I don’t do super hairy types of stuff. I’ve done all of this, continue to do all this. It’s really very practical for people, even if you’re just getting started, especially if you’re just doing a kitchen, if you’re just doing a bathroom, you’re working with one or two trades. I think that’s a really nice way to get started where you’re not having to coordinate these massive projects. You’re just working with a couple of people on a tighter timeline, and for me, that makes these projects feel a little bit less risky and a little bit more manageable. But let’s talk about the big ones. If you were going to buy something that really just it needs a gut rehab, first of all, should new people do this in the first place or is this something more for advanced, more experienced investors? I get this question pretty much every day. IfYou’re going to do gut rehabs, you need some experience. You need a partner with experience, or you need to be working with a trusted contractor who is very experienced and can tell you where you’re making mistakes because when you have a big budget and a big project, we can spend a lot of money doing things that aren’t going to bring back the value.It feels like the stuff that we’ve been talking about prior to the big stuff is all incremental. You’re just looking for some upside with gut rehab or buying something that’s truly distressed. It can be sort of all or nothing. Sometimes you could really lose money, and so the risk reward profile is totally different. That doesn’t mean it’s wrong, but if you are just looking for some upside, if you’re just trying to improve your existing portfolio might not be worth it.I’ll talk about some major things that you can do. There is a whole market for pop tops, right? And that’s where you go find a ranch style home, single level ranch style home, and you literally cut the roof off and you throw a second story on it, and that way you’re adding bedrooms and to the second story. And it’s a cool niche because you’re able to pay retail value for something and still renovate that property and sell it for a much higher price point because you’re literally doubling the square footage. But again, this is not something that you as a beginner want to do because the permitting and engineering process is going to be a challenge with this, and you want to make sure that you’re doing it the right way and that you’re doing it safely and it can be very time consuming and expensive. Another way to add value you had talked about before, and that is can you take a single family home and make it a multifamily home?This is my favoriteMultifamily homes right now in my market. They sell for so much more than single family homes. If I were to go buy a single family home for, let’s call it 2000 square feet, I’m probably going to pay between two 50 and three 50 for that property. If that same property is a duplex, it’s probably valued at three 50 to four 50.Yeah, the secret is out on house hacking. People will pay up for these things. TheyWill pay up for it.You notice now in the descriptions of multifamilies, it’s like house hacking dream or owner occupied investor because it’s true. You can pay more for a property if it has a secondUnit. Absolutely,And that stinks when you’re trying to buy a duplex. But when you’re trying to sell a duplex, it’s pretty great,But you can make yourself a duplex, and that’s by adding the value. And one of the ways you can do that is by taking a single family and making it a multifamily. Now, first and foremost, you need to check with the city and the zoning rules to make sure that your property is either zoned for you to do it or the city will allow you to change the zoning of the property for you to do it. But there’s air quotes, easy ways to do it right now, I say air quotes easy. They’re not really easy, but it’s not like building a duplex. Let’s say you take a single family home, three bed, two bath, 2000 square foot house. What you’re looking for is a split wing house where the primary bedroom is on one side of the house and the other two bedrooms and bathroom or on the other side of the house.
Well, that could allow you to take that primary bedroom and section off that primary bedroom where you’re putting maybe a kitchenette on one wall and you can have a one bedroom studio with a kitchenette. It’s got its own bathroom, it’s got its own entry, or you pop in an entry on a side door there, and now you’ve got a one bed, one bath unit or a studio unit, and you’ve already got two bedrooms and a kitchen and a living room on the other side. So it’s really set up for you to make it a multifamily. Again, you need to check on the zoning and you need to check on the neighborhood and make sure that you’re not the only multifamily in that neighborhood. People are doing this all across the country, especially right now as a DU laws change.All right, Henry, this has been super helpful. I think we’ve addressed most levels of sophistication and challenge when it comes to value add. We’ve done easy, medium. Give us a pro level one though before we go for people who are experienced and are willing to accept risk and work,Okay, pro level, this is not for the fan of heart because you can lose a lot of money, but there are pro-level value ads, and when you think about pro-level value ads, I think about things like renovating single family homes and then selling them as commercial. Whoa. Think about the busy streets in your area that have single family homes on them, but also some of those single family homes are dentist office or law firms, right? At one point, that was a neighborhood that then transitioned to commercial, and so you can look for where the city wants to build more commercial, where there’s current residential and there’s potential for you to buy a single family home, change the zoning because the city will allow you to do it because they want commercial in that area in the future, and then sell that house as a commercial property.
There’s an example of this in my local market, I actually had this house under contract, so I had a house under contract that I was going to live in. We were going to buy it and then renovate it and then move into it. It was close to where my in-laws were. And the reason we decided not to do it is because one of the people on the planning commission is a friend of mine, and when I told her we had this house under contract, she said, well, we’re actually going to expand that road, and so the city’s actually going to come and they’re going to take a good chunk of that front yard, and so your front yard won’t be as big because we’re expanding that road and they’ll probably do some commercial there in the future. So we said, you know what? We’re not going to buy that house. Well, another investor in the local market went, bought the house, renovated the house beautifully, and then sold the house as a commercial property. So I had that house under contract for about $175,000. They bought that house, I think for ended up being like $225,000. They spent maybe a hundred grand or so on the renovation and sold the property as a commercial property for a million bucks.Wow. Oh my God. That is ProLevel. But that is pretty awesome.That is value add, my friend, but it’s pro level. You’re going to have to have a lot of understanding of what’s coming. You’re going to have to do a lot of research, and there’s some risk because he couldn’t turn around and sell that home after putting a hundred grand into it. I don’t think that he could have sold it for a profit as a single family home, especially knowing that the yard, they’re going to lose some of that yard frontage, and so there’s a lot of risk there. So you have to make sure that you truly understand and can sell that thing, and there’s demand to sell that thing as a commercial property, but that’s a great way to add value.Awesome. Well, thank you for your pro level advice here, Henry, and all of your advice. This has been super helpful just for me in my own investing, and I would imagine for everyone out there who’s looking for ways to make deals, make sense right now, these are the types of things that you can do. You can find deals where these opportunities are abundant. It just takes that little bit of extra work working with your agent to identify these things and gaining a level of comfort that allows you to take on these types of projects. But I promise you, I’m not handy. I’m not even good at this stuff, and I can make these things work, and so if I can do it, you can absolutely do it. Henry, man, thanks for being here.Thank you for having me, man,And thank you all so much for listening. We’ll see you next time for another episode of the BiggerPockets podcast.