I first coined the phrase ‘Tenants Don’t Pay for Potential’ in 1998. It’s as significant today as it was then. I’ll explain the ramifications. When buyers consider the purchase of a property, most are not put off by ‘fixable’ faults or issues. These could include an old kitchen or bathroom, general shabbiness, road noise that could be mitigated by double glazing and so on. They know there is an amount of money and time that will see the issue removed. Some actually prefer this opportunity as it allows them to improve or repair the property to their tastes. In general then, a property with potential is still attractive to buyers. Note, I’m not implying here that it’s recommended to present a rundown property for sale without considering cost effective improvements. That’s another topic for another time and would also include the idea of styling. The point is that potential is OK for buyers.
However, will a tenant pay extra because one day the kitchen might be replaced? Of course not – they will only pay for what they are given and perhaps even less if they expect that the upgrade might be attempted while they are living there. Potential is not OK for tenants.
The first takeaway from this discussion is: Always present a property for rental at its highest potential. Take the first opportunity to improve your investment property and lock-in a higher rental for as long as possible.
When we do the numbers, the decision is overwhelmingly obvious. Improving a rental property is the single best investment you can make in real estate with a minimum net return of more than 10%. Now that’s not too shabby! I’ll show you the numbers next time.