Advice about renovating before a sale is mostly written for owner-occupied homes, where buyers respond to how a place feels. Income property is bought by people running a spreadsheet, and the rules are different.
The test is different for income property
On an investment sale, work is worth doing if it does one of three things: it raises achievable rent, it removes a cost the buyer would otherwise deduct, or it removes an obstacle to financing. Work that merely makes the building look nicer generally does not pay, because the buyer is not buying a feeling.
Usually worth doing
- Deferred maintenance an inspector will find. It gets discovered either way. Found before listing, it costs the repair. Found in conditions, it costs the repair, plus a price reduction, plus your credibility on everything else you said.
- Anything a lender or insurer will flag. Knob-and-tube wiring, an aged roof, a failed hot water tank, fire and life safety deficiencies. These can shrink the buyer pool to cash purchasers, which costs far more than the fix.
- Bringing rents to market, where lawful. This is not a renovation but it is the highest-return pre-sale work there is, because it converts into value at the cap rate. Proper notice under the Residential Tenancies Act applies.
- Cleaning, and the grounds. Cheap, fast, and it changes the buyer’s assumption about how the building has been run.
- Assembling the paperwork. Leases, financials, capital schedule. The cheapest value-add on the list.
Usually not worth doing
- A full suite renovation in a unit with a sitting tenant paying market rent. You cannot realise the rent increase, so you are spending capital to improve someone else’s return.
- High-specification finishes. Quartz and designer fixtures in a Class B rental do not raise achievable rent enough to pay for themselves, and the buyer will not underwrite them.
- Cosmetic work over a structural problem. It reads as concealment, and it turns a negotiable issue into a trust issue.
- Anything you cannot finish before listing. A half-done project discounts the price by more than the work would have cost.
The judgement call: vacant or tenanted
A vacant unit can be renovated and re-let at market, which raises NOI and therefore price. But vacancy has a cost while you do it, and a building presented with empty suites raises questions. Do the arithmetic on the specific unit rather than applying a rule.
A simple decision rule
For each item, estimate the rent increase or cost saving it produces annually, and divide by the market cap rate. That is roughly what it adds to value. Compare it to what the work costs. If the value added is not comfortably more than the cost, the money is better left in your pocket — or given to the buyer as a price adjustment, which is cheaper than doing the work yourself.
Talk it through with Rimrock
Rimrock Sales & Leasing works with owners, investors and tenants across Calgary, Edmonton and Lethbridge. Get in touch or call 403-910-4611.