Nicer Homes Make Poor Rentals

Something I see a lot of investors struggle with is deciding on what rental improvements make sense. Part of this is putting aside the things they would want in a home versus what makes a good rental.

We often want nice finishes, an open concept, an extra bathroom and even a guest bedroom.

And while that list may sound silly when considering an investment property, it does get difficult to know where to draw the line.

I know, because I’ve personally fallen into this trap with some of my Detroit rental properties. 

And while it feels great to have a gorgeous looking home, it’s not always what’s smartest from an investment perspective. 

In this post I’m going to tell you some of the pros and cons of having a nicely renovated home over one that’s just average. And I’ll share with you what I’ve experienced as someone who’s over improved a rental house.

First, let’s start with the benefits of having a nicely remodeled rental property.

Nicer Rentals Attract Stronger Tenants & Command Higher Rents

In 2020 we completed a major renovation of a home in Detroit’s Morningside neighborhood. 

We completely updated the kitchen, opened it up to the main area, added a half bath, and made the home overall extremely appealing.

In short, we over improved it for the area.

And we knew we were doing that. But we believed in the neighborhood and its future growth so we figured it would be ok.

At the time, typical rents in the area for a 3/1 bungalow were about $900 – $1,000/month. But our home was about 600 square feet larger than the standard bungalow and sat on a strong street.

In short, in its not-over-improved state it was a nicer than average home for the area so it would likely command higher rent… perhaps in the $1,100 – $1,200/month range.

But with the rehab we did it was extremely nice compared to anything else on the market, even homes listed for sale.

So we decided to shoot for the moon and listed it for $1,700/month. 

And we had no problem finding extremely qualified tenants. In fact, the couple we rented it to made over six figures and had 700+ credit scores. That’s rare in most parts of Detroit.

But there was a problem…

Higher Tenant Turnover

The tenants did not renew after their first year. They loved the home, but they decided to buy after renting for a year.

At this time we were moving from Michigan back to California, so we tested out a property manager. They listed the home for $1,600/month and found a well qualified tenant.

But she also stayed just a year, and I’m not sure exactly why she moved.

After that tenant we decided to retake control of management. We found another extremely well qualified young family at $1,700/month in July 2023.

Luckily, they’ve just renewed for their second year. 

This is the first tenant renewal since owning this home.

And that’s a big deal considering most of our tenants have been with us for a minimum of 3 years. Many are now going on their 5th year of tenancy!

The reality is this home attracts a higher caliber tenant that is generally looking to buy their own home in the near future. 

That’s great for them, but not so great for me as a landlord. Turnovers are time consuming and costly, and I like to avoid them when possible.

That’s especially true when I don’t believe we’ll be able to raise the rent after doing a tenant turnover.

It Is More Difficult To Raise Rents In Nicer Homes

You may have noticed that we initially rented this home for $1,700 in 2020 and that it’s still rented for $1,700 four years later.

Yep, we haven’t raised the rent once.

On most of our rentals we’re doing at least modest bumps each year.

I’ve realized that initially the nice rehab allowed us to command a large premium over market rate rents, but it’s been difficult to push much more beyond that.

Premium rents in this neighborhood only go so high, and I feel like we’re still relatively in line with the premium end of the market. This is especially true given this home has only 3 bedrooms.

While rents in the area have certainly gone up over the last 4 years, I just didn’t feel confident trying to list ours higher than $1,700.

There are a handful of similar homes I’ve seen come up for rent, and they tend to be in line or slightly below where we’re listed. 

In short, higher end rental prices just haven’t seemed to move up substantially. And I believe this is likely true for most areas.

If you over improve a home, you may very well be able to get a rental rate that’s a fair bit higher than market. But I don’t believe that rate will move up as aggressively as the average rental.

If our current tenants do decide to renew again next year I’d probably push for a $50 increase. But the fact remains that the rental rate growth on this home has been lackluster since our initial purchase.

Deciding Whether Premium Rentals Are Worth It

Ultimately, I don’t regret the route we took with this home. 

But in hindsight, if my objective was to maximize cash flow, it may have been a better move to flip this home and dump the proceeds into something like The First Buy Bungalow.

That said, I’m also confident I could sell the home today, as is, to an owner occupant. In fact, the current tenants expressed interest in purchasing it from us.

I was even prepared to entertain that idea if it came up during our renewal this year. But it didn’t. 

The biggest thing to be aware of with a premium rental property is knowing that you may be attracting tenants that don’t plan to stay for a long time.

At least that’s been my experience. 

And perhaps my view is being clouded by our first couple tenants and this will eventually change. I sure hope so!

But I do believe it’s a real risk and it’s a costly occurrence unless you’re able to adjust rents higher each year. Unfortunately, we haven’t felt like we were able to push beyond $1,700/month yet.

Ultimately, I believe a premium rental should be more about capturing appreciation and debt pay down than generating cash flow. As long as you know that going into it and that aligns with your goals, it’s likely a great long-term move.