Value Adds are improvements that you make to a property that increases the value more than the cost of the improvements. Many investors like a turn key property that is completely done with all possible improvements already made. There’s absolutely nothing wrong with this approach if you are willing to pay more and wait longer for your return on investment. However, if you are willing to do a little creative thinking, roll up your shirtsleeves and get to work, value-add properties will give you a much higher return on investment and a lot faster.
But how do you do this? Let’s say you’ve found a cute little house that really just needs a good application of lipstick and mascara, meaning the house is structurally and mechanically in good shape but isn’t as pretty as it could be. Chances are you aren’t going to add a lot of value to your property by cleaning, painting, refinishing the hardwoods and planting a few flowers in the yard. So how do you add value to it? Let’s look at a few options.
Add a Bedroom
Oftentimes the easiest and most cost-efficient way to immediately add value to most properties is by adding another bedroom. If your property is already a 4 or 5 bedroom house, adding another bedroom probably isn’t going to add a lot of value. It might actually make the property harder to rent as potential renters will look at it and think there’s just too much space to fill. However, if your property is a one, two or even a three bedroom, adding another bedroom can instantly add value and will appeal to a wider range of potential renters. This is especially true if your potential renter wants a TV room, playroom for the kids or home office and the property doesn’t offer more than one living space in its original condition.
To add a bedroom to an existing property, you really only have 3 options.
1. Do an exterior add-on. This option can become really expensive and since it requires permits and inspections (in most municipalities), the timeline can be 60 days or more which means you are missing out on at least two months rent or more if the inspector finds issues or doesn’t get out to your property quickly when needed. Also, there may not be enough lot space to legally add-on to the property. Many municipalities limit the amount of square footage that can be built on lots depending on lot size and surrounding houses in the area. Most municipalities require a certain amount of footage between houses. This is called a setback and it refers to the distance a house or other structure must be from a property line. It can also relate to the distance a house or structure must be from a road, wetland, or other areas that are considered to need protection from nearby development. This means that even if your property is in the country or isn’t in an actual subdivision, setbacks may be an issue depending on the size and location of your lot. This route involves money, time, research and expert knowledge. Unless you paid well below market value for your property, this might not be the best option.
2. Turn one large room into two smaller rooms. The average secondary bedroom size is approximately 10 feet by 10 feet. Many municipalities, insurance companies, and lenders require that a bedroom not be less than 9 feet by 9 feet in order to be considered a bedroom. That means you would need to have a room in the house that is at least 25 feet by 25 feet (or some variation of that footage). Remember some of your footage will be used up by the new wall (studs, drywall, baseboards, etc), closet and door openings for the new room. Also note that legally a room must contain a window, closet, and door in order to be considered a bedroom. In most municipalities, the size of the window must be at least 24 inches high, 20 inches wide and no higher than 44 inches from the floor to allow for emergency egress. It bears repeating that some municipalities, insurance companies, and lenders mandate the minimum square footage of bedrooms. This means that if you build an 8 foot by 8-foot room it may not be legally considered a bedroom even if it contains the necessary ingredients listed above. Research is key in any remodel. Better to know up front what you are allowed to do than to incur the expense of building your new room only to be forced to rip it all out down the road.
3. Finding space for an extra bedroom is much easier when you find a property that has more than one living areas, a large sunroom, an open loft area, unfinished basement, a garage or carport that can be enclosed or (my personal favorite) an attic with good head space and permanent stairs. I’m not a fan of stealing garage and/or carport space for interior footage. I’ve rarely seen one of these conversions that don’t scream conversion. In areas of the country where winters are harsh, taking away a covered parking area is the exact opposite of a value-add. However, if your plan for your property is to rent to tenants who are on government rental assistance, converting that carport or garage might be an attractive option as government programs such as Section 8 pay rent based on the number of legal bedrooms. It’s also a value add if you intend to rent the property out to students, again, the more bedrooms, the more rent you can charge.
If your property has sufficient bedroom space and you think your money might be better spent on adding additional living space, basement and attics are still the way to go. A lot of houses have tiny living areas so adding a second living area can be a huge plus to potential tenants, especially those with children. But before you decide to pump money into the basement, let’s look at the reality of the situation.
I’ve seen a lot of sad basement renovations. By sad, I mean basements that have been haphazardly finished with poor workmanship and even poorer materials and/or designs. A basement conversion should be given the same thought and meticulous workmanship that you’d give the main area of the house. In my opinion, perhaps even more as a basement is traditionally a dark area mostly underground so it has a negative reputation right off the bat. In order to make it attractive to potential tenants, it will need to be light, bright, dry, free of odors such as that dank musty smell a lot of basements have and have ample headroom.
Another reason basement conversions can be a horrible idea is moisture. If you bought the property and/or had the property inspected in the dry season, you may not know that once or twice a year that basement floods until…..it floods. Even if it doesn’t actually flood there is always the possibility of moisture on a regular basis. This greatly ups the mold exposure and gives the area a continuous musty smell that will permeate everything that is placed down there. It can and oftentimes will negatively affect a person with allergies or asthma. Money spent on dehumidifiers and exhaust fans that automatically turn on when moisture is present and vents the moisture outside the home is money very well spent in these conversions.
If equity or resale value is a concern, another downside to spending your money on a basement conversion is the appraisal. Many appraisers won’t even count bedrooms, bathrooms, or square footage in finished basements. Even walkout basements. Instead they check a little box “finished basement” and give you a small adjustment. The only time I’d consider spending my reno budget on a basement is (1) if the neighborhood is strong and (2) it’s a true walkout basement with easy egress.
If the two points above are true, then, by all means, finish that basement! While the appraiser might not appreciate the extra finished space, a potential renter (or buyer) certainly will and they will be willing to pay more money for it!
Final thought on basements. Even if you don’t finish the basement into extra living footage, cleaning it up, painting the walls and floors will make it attractive to potential renters or buyers. They will be able to visualize themselves setting up a workout space, a man cave or a hobby area down there. At a minimum, they will see loads of extra storage space.
“This Old House” has some great advice before you attempt to convert your attic space to living space.
Follow the “rule of 7s”: Enforcement varies, but codes typically say that at least half of a finished attic must be at least 7 feet high, and that this area must be a minimum of 7 feet wide and 70 square feet. A contractor or a local building official can help you assess how the rule will apply to your attic and how modifications like dormers can resolve height shortcomings.
Have a pro check the structure: A finished attic weighs a lot more than boxes of off-season duds. Hire an engineer to inspect your house’s foundation and framing to ensure they can carry the extra load. At a minimum, you may need to strengthen the attic’s floor joists, which are often too shallow or spaced too far apart for the job.
Assess your access: If you’re building a staircase from scratch, consider a switchback layout. It needs more room than a straight run (roughly 45 to 50 square feet per floor versus 33), but its footprint is more squarish than linear, so it will often fit in spaces where a straight run can’t go. Just make sure the landing is large enough to maneuver furniture upstairs.
A benefit to an attic conversion is that it will increase the value of your property. The 2015 national average for the return on investment of an attic conversion was 61%. This is a great way to add value and space to your property without the time, expense and complexity that comes with an exterior extension.
Turning a half bath into a whole bath and/or adding bathrooms
You know the old saying “Kitchens and bathrooms sell a house”. It’s true! Sometimes, especially in houses built during the 50’s and 60’s, bathrooms are small and few. If the master has an on-suite bath, it is probably a really really small bath and oftentimes it is only a half bath or a 3/4 bath with a shower seemingly built for a very small child.
If there is any space that you can steal, adding footage to the existing bathrooms is an excellent way to add value to your property. Perhaps there is a linen closet either inside the bathroom or right next to it. Taking out the linen closet might sound like a horrible idea as it is deleting storage but in reality, it’s a great idea. You can always add shelving to the bathroom or laundry room to compensate for the loss of the linen closet but adding footage to that bathroom will bring in more rent and will make the property appeal to a larger group of potential renters. Chances are great that just by stealing the footage occupied by the linen closet, you can enlarge that shower stall and possibly even make room for a larger vanity. If there’s no linen closet conveniently located near the bath, taking a few feet from an adjoining bedroom would work as well.
For those properties without a master bath, adding one is definitely a value-add. Sacrificing a few feet of a large master bedroom or stealing it from a secondary bedroom next door, is more than worth it when you are able to charge more rent. Tenants are willing to pay more money for more bathrooms. According to pocketsense.com, adding a half bath adds about 9% to the value of your property while adding a full bath will increase the value by 20%.
Remember, bathrooms and kitchens sell houses? We’ve covered the bathrooms, now let’s take a look at the kitchen.
You don’t have to gut the kitchen to add value. Simple updates to a good layout will usually do the job. However, if you’ve purchased a home with a tiny and/or dark kitchen, simple updates may not do the trick. The easiest and least expensive thing to do in this situation is to open it up. Below are a couple of pictures that will show you the difference just opening a wall or widening a doorway can make. Many kitchens built in the years between 1950-1980 are filled with dark wood. Top that off with the fact that galley kitchens were all the rage during this time period and you have a small dark kitchen. If your budget won’t support taking out a wall or drastically widening the doorway, sometimes just painting out all that dark wood makes a remarkable difference which will result in more rent.
Dark Kitchen Before
Dark Kitchen After
Galley Kitchen with Wall Removed
Galley Kitchen with widened opening
While it’s not living space, an important feature that potential renters look for is storage. They want plenty of space to put their dishes, pantry goods, linens, Christmas decorations, out of season clothing, etc. Adding storage will take that hurdle out of your way. Simple adds like putting flooring in the attic can sometimes solve the issue.
Basements and garages are excellent storage opportunities. Adding a kitchen pantry or bathroom linen closet in between the existing studs in the wall and then installing cabinet doors will solve the kitchen and bathroom storage issues. However, if your property doesn’t have good attic access, basement or garage, buying a portable storage building from one of the big box home improvement centers and putting it in the backyard will go a long way to addressing your renter’s storage problems.
Of course, there are many other ways to add value to any property regardless of size, style or location. These are just a few ideas to carry with you to your next investment.