Owning a rental property can be incredibly lucrative and rewarding, and history has proven that investing in real estate is one of the most reliable ways to generate wealth over the long term.
However, the smallest details can make or break your investment.
If you make small, smart investments into your home before marketing to new renters, every dollar spent can produce an exponential return for you very quickly. In this article, we’ll break down this math for you with a few different example scenarios. When it comes to this specific value-add methodology, the numbers are very compelling! We’ll show you how a small investment in your home’s curb appeal will generate outsized returns for your rental property.
If you want to maximize your return on investment, focus on improving your curb appeal.
Simple and cost-effective exterior improvements, like those pictured in the before/after photo above, can truly transform the presence of your rental property. The little details, like some fresh paint around the window and door trims, or some inexpensive landscaping to frame your entranceway, can have a huge impact on your rental property’s marketability. And when you improve the marketability of your property, you improve the profitability of your property.
If you’re interested in some curb appeal ideas, check out our article 12 Cost-Effective Ways to Boost Curb Appeal for your Rental Property.
Would you be surprised to learn that a tactical curb appeal investment of $1,500 could put an extra $4800 cash in your pocket over the first two years? That’s equal to a cash return of 160% annually on that initial $1500 investment. We’ll walk you through the numbers below.
In the same way that you would want to make your home as attractive as possible for potential buyers if you were listing it for sale, you should take the same approach to boosting your curb appeal for prospective tenants—great curb appeal will allow you to achieve a higher rental rate, minimize the risk of vacancy loss, and help you find great tenants who will keep you property profitable for the long term.
Perhaps equally important: first impressions are everything! If you make a great first impression on your potential tenants and you show them that you care about providing them an exceptional home to live in, they’ll be more likely to take excellent care of the house themselves.
If potential tenants sense that you take pride in your property, you’ll be more likely to attract the type of tenants who will take pride in the home in which they live—this has a compounding effect on your return on investment: not only will you be able to rent the home faster and for a greater gross yield, you’ll also reduce your maintenance expenses by attracting the types of tenants who will love your home just like you do.
Let’s summarize the benefits of boosting curb appeal for your rental property:
- Minimize the risk of initial vacancy losses
- Maximize the rental rate your home can achieve
- Improve tenant retention (thereby further reducing vacancy loss)
- Reduce your operating expenses by attracting tenants who take pride in where they live
But what kind of return can you actually expect on this investment?
Let’s crunch some numbers:
Here are the assumptions for the control group over a 2-year period, called Scenario A:
- Let’s say your home could rent for $2400/month in its current condition.
- Assume 3 weeks of vacancy loss each marketing cycle, which equals -$1800.
- Assume tenants vacate at the end of each 12-month lease.
- This yields another -$1800 in vacancy after the expiration of the first lease.
- Budget a modest 5% of gross rent toward maintenance expenses during the tenancy.
- Budget 50% of one month’s rent toward turnover costs in between tenancies.
Over a 2-year period, Scenario A produces:
- Gross Rental Income: $54,000
- Calculated as: [($2400/month * 24 months) – $3600 vacancy loss]
- Net Rental Income: $50,100
- Calculated as: [($54,000 – $2700 maintenance) – $1200 turnover expenses]
Now let’s compare to Scenario B, where you invested into curb appeal upfront:
Assumptions for Scenario B:
- Invest $1500 upfront into curb appeal improvements
- ARV (after repair value) is $2500/month (a modest $100/month improvement)
- Assume vacancy reduction by 1 week compared to Scenario A, meaning you budget for 2 weeks of vacancy loss each rental cycle.
- Assume tenants renew for a 12-month term, then vacate thereafter.
- Instead of budgeting 5% for occupied maintenance, assume a reduction to 4%.
- Let’s keep the 50% turnover cost budget the same.
Over a 2-year period, Scenario B produces:
- Gross Rental Income: $58,750
- Calculated as: [($2500/month * 24 months) – $1250 vacancy loss]
- Net Rental Income: $54,900
- Calculated as: [($58,750 – $2350 maintenance) – $1500 curb appeal investment]
Under these two very realistic scenarios, you can see that your $1500 upfront investment into curb appeal produced a fantastic return on investment for you:
- Scenario B generated $4,800 in additional net rental income
- That’s a 9.5% improvement in net yield!
- Scenario B turned your $1500 upfront investment into $4,800 cash in your pocket over a 2-year period. That’s a 320% return on your invested capital! Considering the short 2-year time horizon in this scenario, that’s equivalent to a 160% annual return.
- Considering that the average historic return in the stock market is roughly 8% annually, it’s clear that your $1500 investment into curb appeal went a very long way.
Now let’s examine a “worst case scenario.” Let’s pretend that the curb appeal investment didn’t have any measurable impact on tenant retention, vacancy, or maintenance costs. Let’s call this one Scenario B2:
Assumptions for Scenario B2:
- Invest $1500 into curb appeal improvements
- ARV is $2500/month
- Identical vacancy to Scenario A, at 3-weeks of vacancy loss
- Same 12-month tenant retention as Scenario A
- Same 5% maintenance budget as Scenario A
- Same turnover budget as both scenarios above, at 50% of one month’s rent
Over a 2-year period, this “worst case scenario” model produces:
- Gross Rental Income: $56,250
- Calculated as: [($2500/month * 24 months) – $3750 vacancy loss]
- Net Rental Income: $50,687
- Calculated as: [($56,250 – $4063 maintenance/turnover) – $1500 investment]
As you can see above, even in the worst-case scenario, the upfront investment produced positive returns compared to the control:
- Over the first two years, Scenario B2 generated an additional $587 compared to Scenario A.
- Based on the initial investment of $1500 which earned $587 over two years, you’ve produced a return of 39.1% on your cash investment in just two short years.
- That’s an annualized return of 19.5%, which is more than twice the average return of the stock market!
Let’s look at this from another vantage point, this time modeling a more expensive property, a more significant upfront investment, and a longer time horizon:
Assumptions for control (let’s call this one Scenario C):
- 5-Year investment horizon
- 3% rent increases between tenancies
- Base rent of $3900/month
- Vacancy period of 4 weeks in between tenancies
- 12 month tenant retention
- 5% maintenance budget
- Turnover budget equal to 50% of one month’s rent
Over a 5-year horizon, Scenario C produces:
- 5-Year Gross Rental Income: $227,777
- Year 1 ($3900/month rent): $42,900
- Calculated as: $46,800 – $3900 vacancy
- Year 2 ($4,017/month rent): $44,187
- Calculated as: $48,204 – $4017 vacancy
- Year 3 ($4,138/month rent): $45,518
- Calculated as: $49,656 – $4138 vacancy
- Year 4 ($4,262/month rent): $46,882
- Calculated as: $51,144 – $4262 vacancy
- Year 5 ($4,390/month rent): $48,290
- Calculated as: $52,680 – $4390 vacancy
- Year 1 ($3900/month rent): $42,900
- 5-Year Net Rental Income: $207,984
- Year 1: $40,755
- Calculated as: $42,900 – $2145 maintenance
- Year 2: $39,969
- Calculated as: $44,187 – $2209 maintenance – $2009 turnover
- Year 3: $41,173
- Calculated as: $45,518 – $2276 maintenance – $2069 turnover
- Year 4: $42,407
- Calculated as: $46,882 – $2344 maintenance – $2131 turnover
- Year 5: $43,680
- Calculated as: $48,290 – $2415 maintenance – $2195 turnover
- Year 1: $40,755
Let’s examine the same property from Scenario C if the owner made a curb appeal investment upfront. Let’s call this Scenario D:
Assumptions in Scenario D:
- Initial investment of $5,000 worth of major curb appeal improvements
- 5 Year investment horizon
- 3% rent increases between tenancies
- ARV of $4200/month in Year 1
- Vacancy period of 3 weeks in between tenancies
- 24 month tenant retention
- 4% maintenance budget
- Turnover budget equal to 50% of one month’s rent
Over a 5-year horizon, Scenario D produces:
- Gross Rental Income: $248,359
- Year 1 ($4200/month rent): $47,250
- Calculated as: $50,400 – $3150 vacancy
- Year 2 ($4200/month rent): $50,400
- Calculated as: $50,400 – $0 vacancy due to renewal
- Year 3 ($4326/month rent): $48,667
- Calculated as: $51,912 – $3245 vacancy
- Year 4 ($4326/month rent): $51,912
- Calculated as: $51,912 – $0 vacancy due to renewal
- Year 5 ($4456/month rent): $50,130
- Calculated as: $53,472 – $3342 vacancy
- Year 1 ($4200/month rent): $47,250
- Net Rental Income: $229,034
- Year 1: $40,360
- Calculated as: $47,250 – $1890 maintenance – $5000 upfront investment
- Year 2: $48,384
- Calculated as: $50,400 – $2016 maintenance – $0 turnover
- Year 3: $44,557
- Calculated as: $48,667 – $1947 maintenance – $2163 turnover
- Year 4: $49,836
- Calculated as: $51,912 – $2076 maintenance – $0 turnover
- Year 5: $45,897
- Calculated as: $50,130 – $2005 maintenance – $2228 turnover
- Year 1: $40,360
When comparing the net rental yield of Scenario C compared to Scenario D, the results are clear: invest in curb appeal upfront, and your investment will pay dividends for years to come:
- A strategic investment of $5000 upfront produced a whopping $21,050 in added net rental income over a 5-year period.
- That’s a 10% increase in net income compared to the control.
- Perhaps even more impressive is that you managed to turn $5,000 into over $21,000. That’s a return of 420% on your invested capital. If you had invested that $5000 into an index fund during a strong bull market, you’d end up with less than $8000 after a 5-year period. The numbers strongly favor an investment in the improvement of your rental property.
How realistic are these returns?
Frankly, they’re very realistic, but there are a lot of factors at play that could influence the results. It largely depends the real estate trends in your local market, the current condition of your rental property, and the product class against which your rental ads will be competing.
In the “worst case scenario” example we provided above, even when discounting any positive impact on vacancy rates, tenant retention, and maintenance expenses, the small $1500 investment still produced a positive return on investment.
In a very competitive rental market, especially one that has seen a high level of investor activity, every little detail matters even more—when investors flock to a neighborhood, we tend to see a rapid uptick in the quality of local housing stock; when the quality of your competition increases, you need to make smart tactical investments to keep your property competitive in the market.
How can I estimate the costs of these renovations?
If you have good relationships with local contractors, that’s a great place to start. Reach out to vendors that you trust to do quality work, and they can help you scope out the potential costs in terms of materials and labor. They can help you get an idea of the associated costs, but chances are they’ll also be able to give you some additional project ideas based on their experience with other clients in the neighborhood.
If you want someone to negotiate with the contractors on your behalf and make sure you get the best deal possible, you should consider hiring a local property management company. A property manager will have relationships with quite a few specialized vendors who can assist, and they can likely source competitive bids for different elements of the project so you can reduce your costs even more.
A property management company should be able to help you identify the best team of vendors for the job, and can contract with painters, landscape architects, carpenters, and whomever else will be essential to the success of the project, and they’ll do all the legwork for you.
If the property management company has been active in the area for a long time, there’s also a good chance they’ll be able to secure discounted rates from their vendor network—at Nomadic, we love these types of projects, and many of the vendors in our network offer discounted rates for our clients, so they can maximize their ROI from the outset.
How can I calculate an increase in rent based on the renovations?
Estimating the impact of a renovation project on your attainable market rent is not an exact science. In most cases, this involves a qualitative assessment based on experience in the market.
To get a baseline idea, you can form your initial hypothesis based on comparable rentals in your area. If you have access to an MLS database, take a look at comparable properties that have already rented in your neighborhood and look closely for differences in exterior finishes—try to identify a distinct trend between the rented price and the exterior appearance.
If you don’t have access to an MLS platform, then you can check out some publicly available sources such as Zillow and Apartments.com. If you’re looking at public sources, make sure to keep in mind that the properties you’re seeing have not rented yet; you’re looking at the advertised rate, but won’t be able to assess the days-on-market quite as accurately.
To get the most precise estimation possible, your best option is to speak with a property management company who has experience in your area. They’ll be most familiar with the nuances of the rental market and will be able to draw on their experience to help you make the best decision. Not only will a property manager be able to give you guidance on the potential ROI that you can expect, but they should also be eager to share some strategic guidance and help you craft a winning strategy for the project.
What are the best ways to boost my curb appeal?
There are nearly an infinite number of ways to improve the marketability of your home with simple exterior improvements.
The first step is to understand your audience. Take some time to research your neighborhood and figure out what types of tenants are most likely to be interested in your home. You need to understand your market before you can make a strategic decision on your renovation project. Put yourself into the shoes of your target audience, and ask yourself, “what would I care about most?”
The second step is to examine your rental property critically. Put yourself in the shoes of a discerning tenant and take a walk around the exterior of your home. Take a critical stance and really look at the details—don’t hold any punches! If you can put your own emotions aside and take into consideration the emotions of your tenant base, you can find great opportunities to cost-effectively boost your curb appeal without breaking the bank.
The third step is to determine a rough budget for the project. How much are you comfortable investing at this time? What is your current liquidity situation, and how healthy is your financial stamina at present? Get a ballpark number in mind before you begin any deeper research into the details.
There are a number of basic improvements you can look for at a glance:
- Is your landscaping attractive and well-maintained?
- Could your front door use a new color?
- Can you install some new exterior lighting?
- Is your mailbox a vestige of the 1980s?
- What is the paint condition of your window and door wood trim?
- Is there any exterior clutter that you can clean up?
Where can I find some more specific ideas for inspiration?
Lucky for you, we actually wrote another article with a bunch of specific ideas for boosting curb appeal without spending a ton of money!
You can get some more inspiration from our article, 12 Cost-Effective Ways to Boost Curb Appeal For Your Rental Property.
If you’d like any advice, we’d love to speak with you and hear about your plans. Please don’t hesitate to reach us at any time via email at [email protected].
