Construction is arguably one of the most important components of rental real estate. Whether it is ground up construction of a new rental property, or basic repairs and maintenance for an existing investment, understanding the construction process is key to achieving success as a rental real estate investor.
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Renovating a rental property is intended to maintain rentability, improve property value, and increase monthly income. One of the most important things to consider when renovating is to be mindful of the costs and return on investment (ROI). Renovating a rental property the same way you would renovate your own home is setting yourself up for overspending and disappointment. Quality and durability matter, but simple and practical is always better with tenants.
Once you’ve built it, you now need to maintain it. Rental real estate maintenance is the ongoing act of performing repairs, safety checks, and general upkeep throughout a rental property. Rental property maintenance keeps a leased property in optimal condition in terms of functionality, aesthetics, and value preservation through a number of proactive and reactive maintenance tasks.
Rental unit turnover is a regular occurrence in rental real estate and occurs whenever a tenant moves out and the now-vacant unit is prepared for the next new tenant to move in. Depending on the property type and condition, performing a “turn” (i.e. preparing the unit for the next tenant) can either be a simple cleaning or full renovation.
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Commercial Tenant Improvements
Commercial rental units are seldom perfectly built out for a business tenant. As such, business tenants will often request “TI” or “Tenant Improvement”. Tenant improvement is defined as the customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that particular tenant. It is very beneficial for both business tenants and rental real estate owners to understand exactly what “Tenant Improvements” are and what is normal industry practice to ask for and provide.
Value add is an investment and construction strategy used by real estate investors to take existing rental properties that require improvements, perform those improvements or upgrades, and then increase rental rates. Since real estate depreciates over time (e.g. faded paint, outdated light fixtures), it is a fairly stable and repeatable process to perform.
Materials & Products
Selecting the right products and materials for your rental property investment is an important decision to ensure the project is profitable and long-lasting. These goods are usually divided into 2 categories: Materials (i.e. raw) and Products (i.e. finished):
Building Materials, also called Construction Materials, are the raw materials used in the construction process. They differ from building products in nature by usually being more un-finished in nature. Another way to think of building materials is that they do not provide useful utility until they are assembled into a structure. Examples of commonly used building materials include wood, sand, cement, roofing, etc.
Every piece of rental real estate is built with thousands or even millions of different types of building products and materials. From the cement foundation, to the door handle, each product has its own unique purpose.
Building Material & Product Vendors
Where do investors buy building materials? As a rental real estate investor, a big component of your budget will be spent at building material supply and home improvement stores such as Home Depot and Lowes. Neighborhood hardware stores are great for smaller specialty items needed ASAP, and regional building material stores such as a commercial plumbing or electric supplier might be a good option for bigger jobs.
Contractors & Tradesmen
Who does the construction work on rental properties? Finding the right rental real estate contractors and tradesmen is a much harder task than one may anticipate. The ideal service provider would be dependable, honest, affordable and deliver quality work. Unfortunately, this is seldom the case. On average, most are a combination of the few but seldom all in one. The best way to find quality contractors is coincidentally word of mouth from other real estate investors. Alternatively, you can use online service directories such as the ones listed below:
Ground Up Development
Ground up real estate development can be one of the most challenging and time consuming endeavors of rental real estate, but can also be the most lucrative. While it is often a long and capital intensive process, it usually follows the same process across all asset types:
- Market analysis and feasibility studies
- Land Acquisition
- Site plans, development plans, and building plans
- Securing Financing
- Marketing & Pre-Leasing