Here’s how you are wasting $10,000 to $50,000+ fixing up your Minnesota rental homes too early
After being a landlord from 2002-2008 I noticed some wasted expenses that just weren’t needed had I planned better or times the cycle better.
This article is about Minnesota landlords repairing or updating homes with $10,000 to $50,000 too early in the process of owning a rental.
Let’s first start by clarifying what I’m NOT talking about. Those that search for distressed properties in probate, tax forfeiture or foreclosure where the house needs a lot of repairs, but your exit plan is to sell the property while vacant and as quickly as possible to avoid holding costs.
That’s a different strategy to make money actively with flipping your money. If you put in a lot of money with the idea that you are getting it back out with more a few months later you are pretty liquid making active returns.
What I’m referring to in this article is someone who goes in with the intention of holding a Minnesota rental home long-term. With interest rates very low you can often cash flow long-term if the numbers make sense.
What some landlords may do here is put in $10,000 to $50,000 in repairs upfront only to keep that equity trapped in the property for years and not making money for you.
Now you could do a cash our refi later or a HELOC, but those will be difficult as lenders won’t lend on. Very high LTV like 80% or 90% LTV because it’s a non-owner occupied rental.
Plus you are being very leveraged by doing that, you are lessening monthly cash flow in many many situations, becoming less liquid in case of a downturn and also of the local real estate market goes down only 10-15% you can get stuck by being over-leveraged.
A lot of times you can rent out a property in average shape because you will end up putting in new carpet, paint and many other items after many renters will cause damage over the years, so what you thought was monthly cash flow ended up not being after years of re-fixing up everything that you put so much money into.
You have to be careful of how much of your capital that you tie up into rental properties that will eventually need fixing again.
Something simple like adding an egress windows to make a home a three bedroom vs. a two bedroom would be a great investment because often you can get $500 per month more for a 3 bedroom over a 2 bedroom and you’ll easily pay that back in less than a year cash on cash return.
Why tie up an extra $50,000 in updates or fix ups of your equity for an extra $100-$200 month in many cases when your equity could be working for you.
Another example of fixing up things to early is replacing roofs, siding , outside A/C , flooring, windows, as exterior items with your hard earned money today. The probability of a hail storm in the 5 years that you hold the property as a rental is pretty good.
This can easily be $10,000 to $50,000 in insurance claim coverage even after factoring depreciation.
Also why fix up all of the expensive exterior costs before you absolutely have to, or before you sell to a retail buyer.
So as you can see, many landlords will sink money into a property years before they need to which not only will they not have access easily to that capital or equity, they Also will end up fixing the same items second time before selling.
If you are a burnt out landlord, or a motivated home owner to sell, click on the link on my website, see if your home qualifies, and message me online.