Can ugly rental properties be profitable?

Beth Clymer
Beth Clymer | 6 min. read
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Published on March 24, 2014

You’ve found a property in a decent overall location that matches your budget. You’ve calculated the potential return on investment, developed strong relationships with lawyers, tax professionals, bankers, and property insurers, and you’re well versed in the rules and technicalities of property management.

There’s just one problem: It’s ugly, and it’s surrounded by ugly.

An ugly house or rental property is not a death sentence for property managers. Renters are savvy consumers, and exterior appearance often matters far less to them than rent cost, overall location, and functionality. The key to successfully renting out an undesirable building is to market its existing advantages and offer other incentives to renters in place of aesthetic appeal.

First, however, ask yourself these questions:

  • Is the property located in an unstable area that will prevent its value from appreciating over time?
  • Is the property in disrepair, creating potential liability?
  • Are you unable to take on the risk of delayed profit and cash flow?
  • Will the effort involved with renting a challenging property offset its potential reward?

If the answer to any of these questions is “yes,” then taking on an ugly property is an unwise decision. If not, however, a traditionally ugly property can be your proverbial diamond in the rough.

Do Your Research

Observe the property with a professional eye. Just because it’s an eyesore doesn’t mean it is structurally unsound, hazardous, or in violation of established commercial/residential standards. The fact that it’s surrounded by vacant warehouses doesn’t change the fact that the property value could skyrocket once these properties are developed into boutiques, restaurants, or parks. One property manager’s creepy next-door cemetery is another property manager’s quiet, residential zone with guaranteed air rights.

Explore the area thoroughly to determine the market. Attend open houses, search for existing vacancies, and scope out neighborhood initiatives. Check the going rates for renting similar units in the area, including those that do not face the same handicaps that your potential property does.

Crunching the numbers is not the most glamorous aspect of property investment, but it is far and away the most significant one if you hope to turn a profit. Bear in mind that this profit might come slower when you are working with a less-than-aesthetic building, but if you can afford to wait the extra few years, the rewards that an “undesirable” building potentially offer can turn out to be quite gratifying.

Lastly, do your due diligence: Depending on the property and how it is zoned, multiple inspections may be necessary. Be prepared to lose out on that money if the building does not measure up to codes – or to spend additional funds on the actions needed to correct issues.

Offer Incentives

Remember all those numbers you crunched?

Take into account when you create your long-term budget strategy that you will need to be able to justify your ugly duckling property with incentives. Be realistic with your rent prices. If demand for rental property is high, then you can afford to set your rent prices at an above average rate, but you still have to adjust your rent prices in order to compete with more attractive properties nearby. If the market is not currently in your favor, your ability to leverage higher rent will obviously be significantly lowered. Either way, consider pricing your units for five to seven percent less than competitors. Tenants are often willing to overlook certain drawbacks as long as the price is right.

Lowering rent can only go so far before it offsets profit, so consider working with local Internet/cable companies, residential moving companies, gyms, stores, or restaurants to provide renters with discounted services. Partnering with community businesses is a win-win for all involved, and it can even increase word-of-mouth referrals and the overall resident experience.

Of course, offering new resident bonuses is a tried-and-true method of attracting renters. However, reducing turnover is also good for business: Offering monthly drawings to current clients for a month of free utilities (to a limit), for example, is an investment, but it can lead to decreased turnover and happy tenant relationships. Ensure individual rental units are updated with appliances that are as high quality as your budget can afford, and maintain a clean, functional property. Pragmatic renters may care very little about the appearance of a building, but function is paramount.

Choose Your Upgrades Wisely

You don’t have to spend a fortune to make your property more appealing. A fresh coat of paint, new tiles on the floor, better lighting on the property, and regular inspections are small upgrades that can have a big impact in making residents feel safe and comfortable. By keeping your property well-maintained and clean, you are not only making it more attractive to would-be tenants, but you are also taking care of your investment and improving your property’s value and return.

Even if you can’t afford granite countertops and stainless steel appliances in each room or unit, you can still implement certain renovations that will improve their overall desirability. For example, you can minimize road noise with strategically placed hedges or trees and install environmentally friendly appliances throughout the property, improving tenant satisfaction and your business image at the same time.

Work with Your Tenant

If you find (or have) a reliable renter who is willing to overlook the cemetery next door and doesn’t mind the slightly uneven floor in the living room but wants a new bathtub in the bathroom, keep an open mind. Is it more important to retain your clients with relatively small investments in fixtures, or is it better in the long run to find another renter?

Give renters freedom to redecorate (or even renovate, within reason) their living spaces. As long as they work alongside competent, insured contractors, improvements and customizations to your units will bolster tenant relations and potentially improve your property’s overall worth. When you have a hard-to-rent property, it is important to be flexible in order to land (and keep) a good renter.

The real estate market offers many challenges. Finding a way to rent out an ugly apartment or home is just one of them. However, with a keen eye, persistence, and some outside-the-box thinking, the risk of investing in an ugly rental property can pay off in a major way. By setting a reasonable price, implementing affordable upgrades, offering tenant incentives, and working with them to improve their experience, you can turn your diamond in the rough into a gem.

Read more on Maintenance & Improvements
Beth Clymer

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