Designing Remodels and New Construction for Rental Properties

Focus on Value, Maintainability and Simplicity

If your exit strategy for a property you are going to hold a project as a rental property, your business priority will generally be focused on maximizing cashflow.   While some buy and hold investors are happy with just solid appreciation and the tax benefits that come with rentals, most people invest in rental properties for passive income, or cashflow.   You maximize your cashflow by:

• Maximizing your income (rent and fees)

• Minimizing your expenses (mortgage, insurance, maintenance, taxes)

This is not to suggest that your total cost to acquire and build your project is not relevant – of course it is.   You will always want to minimize your cost of acquisition.  If you minimize your upfront costs, you can minimize your trapped cash, as well as your mortgage which will help minimize your ongoing expenses and increase your cashflow.   However, there will be opportunities to potentially add costs if you think that a particular upfront investment in specific features or finishes will allow you to charge a higher rent.

You will need to do competitive analysis, similar to what you would do when building or flipping a house.  However, your focus here will be focused on active, and recently leased, rental properties.  You will want to analyze the square footage, number of beds and baths, features and finishes of similar rental properties in your neighborhood to determine your final market-based rental price.  If you are in your planning phase, you will want to do your competitive analysis to help you proactively determine what features you need to be competitive in the market and to reach a certain rental price-point.  There are value based decisions on many things including new construction decisions such as do you need 3 beds and 2 baths?  There are also many finishes choice-points including things like countertop and flooring materials. 

For new construction, when we have built properties specifically to be held as a rental property our three top considerations were:

1.     Use a simple architectural and structural design approach to minimize both upfront costs as well as future maintenance costs.   Complex roofs, windows, skylights and similar architectural items cost more up front and are more likely to have maintenance issues over time.

2.     What were the optimal number of units we could build on a certain lot?  As an example, we almost always can get more income from a duplex over a single-family home

3.     What is the optimal square footage and numbers of beds and baths for each unit to maximize rent

Where you begin to really see a difference between projects for sale, and buy and hold, is in your strategy for finishes.   You certainly want things to look new, nice, and upscale, just like a project for sale.   However, because you are going to hold onto the property for several years, or more, you need to also think about the durability of the property and how to minimize your maintenance costs.

You will want to use more durable materials and simple, reliable, and low-maintenance design elements wherever possible.   Some examples include:

• Choose tile over wood floors:   Tile is extremely durable while wood floors can be easily damaged or scratched.

• Choose Luxury Vinyl Plank (LVP) over carpet:  If you need a low-cost flooring solution, LVP is a great option.  While a little more expensive than carpet, it is still very affordable and very low maintenance.

• Pick light fixtures with standard and easily replaceable, standard light bulbs:  Avoid specialty bulbs or fixtures with built-in LEDs to ensure tenants can own replacing their own lightbulbs!

• Install low-maintenance landscaping with drought tolerant plantings:   Avoid lots of grass and large gardens that require a lot of water and maintenance.

• Use prefabricated granite rather than laminate countertops:   Laminate countertops are one of your cheapest options but are easily stained and damaged.  Prefab granite is very affordable, is highly appreciated by tenants and is very durable.

• Use Smart Key’s vs. standard locks for exterior doors:   This will lower make-ready costs.  You or a property manager can easily change the locks between tenants and avoid having to pay a handyman or a locksmith.

• Use eggshell vs. flat finish paint:  Eggshell is much easier to clean which may save you on your make-ready’s.

You will also want to use less expensive materials where your resident won’t appreciate the difference.   Some examples may include:

• Hollow Core interior doors vs. Solid Core

• Low-cost ceramic or porcelain tile vs. premium tile or marble

• Basic stainless-steel appliances vs. premium appliances

• Simple baseboards and trim vs. premium trims and molding

• Factory-built cabinets vs. custom made.

• Metal or fiberglass exterior doors rather than wood.

• Vinyl windows rather than wood.

Neither of these lists are meant to be all inclusive but hopefully they will start to give you an idea of how to think about your project design and finishes when you are building out a property as a rental.

In conclusion, designing remodels and new construction for rental properties requires a focus on value, maintainability, and simplicity to not only maximize your cash flow but also to ensure long-term sustainability and tenant satisfaction. By prioritizing features and finishes that are cost-effective, durable, and appealing to your specific rental market, you can enhance the desirability and competitiveness of your property. This strategic approach to real estate investment demands a balance between upfront costs and potential returns, emphasizing the importance of thorough market analysis and smart design choices. Ultimately, adopting these principles can lead to a more profitable and manageable portfolio of rental properties, aligning with your goals as an investor to achieve both financial growth and operational efficiency.