How to Budget for Your Rental Property Kitchen Remodel

Custom designed home with an open floor plan over hardwood floor and an island kitchen counter with granite countertop over wood cabinets

Making even relatively small changes to a kitchen design typically brings a return on investment (ROI) of 82.7% when it comes time to appraisals. If you’re a landlord considering a kitchen remodel on one of your rental properties, you may be wondering how much to spend on the project before you begin consulting commercial contractors. Here are some points we have discovered at DeWald LLC. to consider when making a budget for your remodel.

Keeping or Selling?

Before you start calling commercial contractors for kitchen remodeling, one major factor to consider is your holding period. Do you intend to keep the property long-term, or do you think you’ll put it on the market in the next one to two years? If you want the property to be purchased by an owner-occupant, you should plan to spend more on the kitchen renovation. Purchasers will want to see features such as granite countertops and high-quality wood cabinetry. But if you want to keep the property or sell to someone else who’ll rent it out, you should opt for long-lasting and inexpensive materials, such as vinyl planks for floors and counters made of laminate.

How Much Can You Charge to Rent or Sell the Property?

This is where ROI comes in. Look at comparable properties to determine how much more people are willing to pay as renters or owners for a property with a newly remodeled kitchen, as opposed to a kitchen that hasn’t been updated in a while. You may need the help of a realtor to make this determination, or you may just need to see how many units in the same building have sold or rented for.

One important point to keep in mind: If you’re going to keep the property after the kitchen remodel, take extra care in checking future tenants’ backgrounds. You want responsible people who aren’t likely to damage the kitchen and therefore won’t reduce your ROI.

How Much Are You Willing and Able to Spend?

Before you consult with commercial contractors, you’ll need to realistically assess how much you can afford to spend and where the money is coming from. If you’ve saved a good deal of cash for repairs on your rental property, as all landlords should, you may have enough to cover a kitchen remodel; just make sure there are sufficient funds left to cover emergencies.

But if you plan to cover the costs of the kitchen remodel with a loan, you need to calculate your ROI with the loan interest included. The interest will reduce your ROI.

Add 10% to Your Total Budget

You need a 10% padding to cover unforeseen expenses. It’s hard to know exactly what a kitchen remodel will cost until the commercial contractors start the work. You don’t want to find yourself with a renovation you can’t afford to finish.

What’s an Ideal ROI?

Here are some important points to ponder when deciding whether your kitchen remodel is worth the money you plan to put into it:

  • How much more can you charge for rent, and how long will the rent increase last? Usually, a kitchen remodel will increase value for up to 10 years, at which point it will no longer look as fresh and new.
  • How much will your equity value increase due to the remodel? The property’s value should increase by at least the same amount of the renovation.
  • Investing in new appliances and fixing electrical and plumbing problems mean fewer repair costs for several years after the remodel.
  • Rental properties with newly remodeled kitchens and higher rent typically appeal to more trustworthy tenants, who will save you money by taking better care of your property.
  • Your rental property will be vacant less often with a kitchen remodel, meaning you won’t lose money as the property sits empty.

What’s an Ideal Payback Timeline?

Some experts claim that the payback period should be two years, meaning that you make back the money you invested on the remodel within that time frame. Others feel that even a small increase in rent that pays you back for the remodel over a longer period is worthwhile.

Clearly, a kitchen remodel on a rental property is a major undertaking. Accurately calculating your ROI is key, and so is hiring the right contractor. Contact our team today for a free consultation.