Stop Over-Improving: How to Renovate for Profit, Not Preference | Ep 102

James: Would you spend $10,000 to make 15,000? Sure. Sure. But what if you would only make 5,000?

Jessi: No.

James: All right. What the question is, how do you know what is what? Which is what we're gonna talk about today on the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing.

And our mission is to equip people to invest wisely, especially when it comes to home reserva renovations, so that together we can build our wealth while improving housing. I'm James, and this is my wife, Jessi.

Jessi: Well, it's not a home improvement, but I did just harvest this fall. A bunch of grapes, a couple

James: bunches.

Oh my gosh. How many gallons of grape juice did you make?

Jessi: Okay, so that, let's see if we can do some quick math here. I did that big. I like the big pot, like the uh, steamer pot thingy. Mm-hmm. I filled that four times. Juice. That's a lot. So how, I don't know how big that thing is.

James: It's at least two gallons.

Jessi: Yeah. Yeah. I mean, two

James: to three. You're probably, I think that's a 10 gallon container. That that container is

Jessi: 10 gallons.

James: Yeah. And you filled it halfway, right? Ish.

Jessi: Um, well. Yeah, I think, if I remember correctly, with the canning, it's like a 10 down, 13 down and the, okay. Yeah, so maybe halfway. So five-ish gallons per, I think you, you're on 15

James: probably.

Dang. That's a lot of juice. It's a lot of juice. I froze some, gave some

Jessi: away, drank a lot of it. I think that was Someone's breaks.

James: Okay. I was like, oh, weird humming noise. Aliens have arrived. Um, it's probably one of those electric cars. They gotta have the weird sounds for it.

Jessi: Yeah.

James: Uh,

Jessi: yeah.

James: Cool.

Jessi: Anyways, um,

James: that's an improvement in it improved our garden.

I cleaned our drinking status.

Jessi: Ooh.

James: Yeah. Yeah. But I wanna talk about home renovations. Yes. Because that's often a question that investors have, which is. What improvements should you do, especially when you're doing a value add deal. And so I kind of want to give you, as a passive investor just kind of a here's what things to look for and to listen to mm-hmm.

When you hear plans mm-hmm. To kind of help you with that gut check. Does this make sense? Sure. We're not, because if they are saying like, oh yeah, we're totally gonna. Do this thing that I don't know. We're gonna, what's the change? All the light fixtures. We're gonna change all the light now. I actually like that one, but, uh,

Jessi: okay.

We're, we're gonna, I don't know, build something in the backyard. We're gonna, if we're gonna

James: install a really fancy bird feeder in the front yard. You're like, Hmm, is that gonna really end about yous or not? And so we're gonna talk about that. Sure. Um, yeah, and I think it's important because in 2021, the average return on investment I did a little bit of research was 63%, which is fantastic.

Yeah. Um, it dipped down in 2023 and it's back up to like a 75%. Oh Lord. Um, yeah. Now part of that is just real estate itself is just blown up. And so it makes it easy to get a return on stuff, but it's still important to know. Um, yeah. Wha what you doing? Mm-hmm. And so, um, there are a lot of renovations though that also lose money.

And there's some very specific reasons or. There's reasons why mm-hmm. I guess, um, or ways to not lose money is my, maybe the better way to say it.

Sure.

So like good things, they add functional square footage to it. Um, they fixed deferred maintenance and they align with neighborhood norms. Okay. I think is important.

Yeah, you

Jessi: kind of said it in there, where I was thinking is like, you're mostly talking about renovations that are adding value, not necessarily like a repair. Although

James: we're gonna talk about that, but Yeah.

Yeah.

Jessi: The deferred maintenance and, mm-hmm. That all, it's all in there.

James: So the golden question that you want to ask.

Is, can I improve the appraisal faster than I drain my cash reserves?

Jessi: Okay.

James: Yeah. And again, it's just, you're just looking for like, what can I get a positive? Mm-hmm. An RA, what can I get a positive ROI with?

Jessi: Is that specific to flips or with any maintenance? Um, or any

James: renovation? Any type of renovation. Mm.

Yeah. There's not a lot of differences to be honest. Mm. The thing with a flip is it like it just goes for all of 'em all at once.

Jessi: Okay.

James: As opposed to like a rental might be like, Hey, I'm going to, we're gonna start with these ones. Mm-hmm. And then move down a list as we see necessary. And sometimes it has more to do with attracting tenants.

There's things that tenants value and will pay for Sure. Versus someone moving in. So kinda kind of play that. Mm-hmm. Which honestly, it's more of a, uh, if you were to draw the Venn diagram, it's, if there's a big circle for. What homeowners will pay for. Mm-hmm. Within that is a smaller circle of what rent, what tenants value.

Mm-hmm.

So, so they all get it. All right. So let's talk about the winners. Let's talk about the horror, the high ROI, ones first. All right. And then we will talk about the losers. Um, this first one, I know you're gonna like, 'cause you semi mentioned it.

Jessi: Mm-hmm. Carpet floor flooring.

James: Flooring. Yep. All types of flooring.

Refinishing, wood flooring. It has 147% return on investment.

Jessi: Okay. Also somehow refinishing wood floors on my YouTube kind of popped in there. It is so satisfying to watch. Really. And it makes a huge difference in the, there you go. There you go. It's incredible. Yeah. But the way that it, like, it opens up the space, it makes it like look brighter, fresher.

It's amazing. Newer, like, yeah. It's just like what? I'm, oh man, you got me. Whoa. Don't tempt me. Frodo. Oh man. I want to tear out our carpet so bad. I know, because I'm pretty certain there's hardwood under there. There's at least hardwood in, in like sections where they've taken the carpet out. And so I'm like, man, it's

James: gotta be, it's like our kids' bedrooms hard, right?

Our closet's hardwood, which makes me, it's gotta be, there's gotta be. Flip. Yep. I'm like, see,

Jessi: it's worth it. I know it's worth it, but we're not looking to sell this house. So yeah, but it's a little, just an expense. I mean, there's like different kinds of, plus our ducks slip slides all over the kitchen floor does.

He likes the carpet. Ah,

James: anyways, someday. That's all right. So that's the first one. Next one. Garage door replacement.

Jessi: Really?

James: Yeah. It's 103% return on investment. It's 'cause it's an instant boost to curb appeal. Oh

Jessi: yeah. Okay. I can see that. Yeah, because it's a huge big wall. Yep.

James: Yep. That everybody sees which artists could definitely, yeah.

I could do some, some fancy, yeah. Garage door replacement for sure. Huh. I know when we had a house that we were managing, it had a funky garage door, and I was like, the tenant's very first thing, like, can you fix this? Yep. Like, this is just hard to open and close hard. But you can do it like, yeah, but it's hard.

I'm like, okay. So that's a big one. Um, and then the. Right here the, the hvac.

Jessi: Oh, yeah.

James: Yeah. Just modernizing that, updating that whole system. Yeah. Yep, yep, yep. That's another, is that,

Jessi: does that include like, maximizing or getting efficient? What is the word for the pink stuff? Pink.

Fluffy insulation. Uh, no insulation, heating, like layering or, it's different.

James: This is more like, it's just putting in the fancy thermostats. Ah. And putting in high efficiency units. Okay. That kind of stuff. Interesting. Yeah. Yeah.

Jessi: More of the actual, the actual stuff.

James: Um, adding like the ductless systems.

Mm-hmm. People seem to like those. I think they're super ugly, but. Other people like 'em, so you, whatever. Yeah,

Jessi: I don't know.

James: Yeah, there are other winners, other smart investments out there. I got six others for you. Doing adding some sort of siding, like a stone veneer, siding, it's not as much, it's not like a 90% to maybe a hundred percent.

Jessi: That one's weird to me. It's

James: the whole corner pool curb appeal, people. Shockingly high. That's weird. Some of other ones here make senses. Improving the, the entry door to like a steel entry door. This is pretty steel. Steel, yeah. It's secure as opposed to wood is a big one. Yeah.

Jessi: Houses have steel doors of that Seems like you would, it's kind of on business to

James: high end.

Homes don't, but. Mm-hmm. But a lot of rentals do. Interesting. Almost every single one of my rentals does.

Jessi: I just have never paid attention to that, but yeah. Okay. It's a secure upgrade that work

James: and it helps with insulation and yeah, I guess like, makes sense.

Jessi: So. Are we gonna get a steel door at some point?

James: No, that

Jessi: seems weird.

James: I wanna get like an all glass one for the dog.

Jessi: Yes.

James: Uh, minor kitchen remodel is the next one. Mm-hmm. That's usually what's at the top of most people's list when you ask 'em what's the kitchen

Jessi: and bathroom, right? Yeah. Is like, which I'm

James: pretty sure is the next one. Yep. Bathroom remodel.

Jessi: Yep.

James: Uh, yeah. Kitchen remodel and bathroom kitchen's like, like a 86 to 96. Bathroom remodel is like a 70 to 90. Yeah. And it's kind of a minor kitchen remodel, not just the full blown, take it down to studs and start over. Mm-hmm. That's. That starts to watch.

Jessi: It's

James: just making it a little

Jessi: bit nicer.

James: Yeah.

Yeah. Um, so those are, those are good investments again, that's, yeah. Those are usually the ones that people think of. Um, but I was kind of surprised when doing the research. I was like, oh, curb appeal. And it's, and it's from an ROI standpoint, which is like, it's not a lot of dollars to get a big boost.

That's, that makes sense. It's not to say, yeah. I think most people would prefer to have the kitchen upgrade, but if you're like, Hey, I only have a thousand dollars to spend, you're like, yeah, buy a new door.

Jessi: Yeah.

James: That's the. Sense, that's how to think about that. Uh, another one, um, a deck edition is a big one because it increases your living space.

Oh,

Jessi: so it, but a deck specifically as opposed to like putting in a gazebo or Correct. Little, you want attached to your house. Little patio you thing or something. There might be new ones there that's not captured in the research. Sure. But, uh, interesting.

James: In general, a deck. People like having, huh? Like that easy walkout, no mud, just right there.

That kind of stuff. Mm-hmm. Yeah. Yeah. Super nice. And then, um, the finished basement or attic mm-hmm. Is another one. That's a hard one because it could just, it, it's just a lot of money and that's about 70% return on investment, so it's great. You should still do it Well because it's just, they're just bigger projects.

Yeah.

Jessi: It's similar to the deck one now, like it increases your living space, but it is more expensive, so. Mm-hmm. Yeah. Yeah. So you have

James: to weigh in. Uh, yeah. And again, all these things have caveat, like are you adding a bathroom down there? Are you adding a wet bar? Mm-hmm. There's, there's different things that can, that mess with that equation.

Mm-hmm. So these are all just general rules. But again, think of it as a passive investor standpoint. If someone talks about doing one of these things, like, Hey, we're gonna increase the value, and you go, okay, yeah, that feel good about that.

Jessi: It's not really renovation, but like where does upgrading appliances.

Fit in there? Is that like that minor kitchen remodel or, yeah,

James: I'd put it in that category, you know? Yeah. Because

Jessi: it's kind of like, you know, some, some of those replacing appliances are just, just updating them depending on what's in there can make a difference. But

James: it's weird. That might just file under the maintenance category.

Oh, interesting. And it's. That's a good question. I always go for it. I like doing it personally 'cause I just think it looks nicer. Yeah. And pull pulls everything together. It's cleaner and it is not a lot of money for, it's like an internal curb appeal, sure. But yeah. Mathematically it's like, eh it's, it's okay.

It's good. Take it or lose it. It's not, it's not a loss. Everyone's been talking about the new gold mine of ADUs. Yep. I, they're okay. Mm-hmm. Uh, it's like a 20 to 25%. Increase. Yeah, that's not nearly as much as I would've, but, but the problem is, and I, I like this, when I saw it, it was like, ADUs, they're the new gold mines until you see the $180,000 build cost.

Which I was like, yeah, where are you building that for 180,000? Which again, this is like nationwide stuff. Uh, I think on the West coast specifically, it's not a great. Return on investment. Um, it just doesn't make sense. Yeah. Now if you can split the lot and have land go with it, like that's a different story altogether.

Um, but when you just think about renovations, that's one where I'm like, eh, you might think twice about the a DU one. It could. Yeah. Especially if you're talking about West Coast. Yeah. If you're inland, that, that's a different story. But West Coast it's hard to make those numbers. Is that because

Jessi: we have more space for building typically and people don't wanna be like, crammed in or

James: No, it's just the building costs are a lot's hard Yeah.

The requirement, the requirements, the fixed cost requirements that go with it, like having yours STCs, which is the cost to like, just to hook up to water and sewer is expensive.

Jessi: And that's like West Coast versus mid states. Yeah. Midwest and Midwest. Mm-hmm. And East,

James: huh? Yeah. Interesting. Yeah. Um, I would imagine high regulation states the numbers don't make sense.

Yeah, that's my guess. Yeah. All right. Let's talk about the money pits. All right. Um, so luxury over upgrades. It's like marble baths, gourmet kitchens. Yeah. It's just personal taste doesn't necessarily equal value. It's like

Jessi: steamer amazing showers.

James: Yeah. I, I have this one person we're talking about, um, bringing her on as a client and they ha she has a spa in the middle of the living room.

No,

Jessi: the living room.

James: Yeah. With like glass casing and all sort it's kind of crazy. And she's like, this feature's amazing. I'm like, I should get a premium for it. And every time I'm like, ah, I just, I don't know if I'm seeing the numbers for it. And like, so we were having discussions, we're like, I actually think you should decommission it.

'cause the problem she's running into is. So she used to have it as a vacation rental, which I was like, awesome. Totally makes sense. Love it. Yes. But now she's turned it into a long-term rental and tenants are like, that's cool. And then never use it. And now they're saddled with this thing that they have to like, yeah.

Maintain. Maintain. And it's like super annoying and. So I'm just like, yeah, I don't know. So that's definitely falls into that category. Interesting. Of a money pit thing. Swimming pools and hot tubs, speaking of which, yeah. Not great. This high maintenance, they're climate dependent for their appeal.

Yeah. Though I would love to get us a hot tub. That'd be fun. But but yeah, it doesn't make sense for an investment if someone's like, yeah, we're gonna, again, maybe if you're investing in vacation rentals, sure. The equation changes. I get it.

Jessi: Or different climate. You know, perhaps it perhaps makes sense. I don't know.

James: Yeah. Maybe, um, garage conversions. I was surprised by this one. Um, so buyers, they want storage and appraisers rarely credit the conversions

Jessi: Oh. For it. So they won't, like, even if you convert it into a living space, they won't count it as a living space.

James: Yeah. And now I would say if you turn it into like a, essentially a single family home into a duplex and make it a standalone, that might be different.

Sure. But usually it's like, it's just another bedroom.

Jessi: Yep.

James: And it's just not quite worth it.

Jessi: Alright.

James: Apparently. There you go. I was like, I'm surprised by that. But

Jessi: yeah, you would think with the other things that like add living space, like a deck or Yeah. You know, add on conversions or whatever, but

James: Yeah.

You think, Nope, it's not necessarily. Hmm. Yeah. And then, um, the similar highly personalized spaces like movie theaters, wine cellars, home gyms.

Jessi: Yeah.

James: That kind of thing. Not quite, yeah.

Jessi: Those

James: which.

Jessi: I mean, it makes sense because people wanna design those spaces based on what they want and Yeah. You know how they spend their time and it's very niche.

James: It's actually, that's one of the bummer parts about flipping. It's like everything is like, what is cookie cutter? Yep. Mainstream. Once, just the basic boring, I want the boring colors, like, yeah. Whatever. It's a Yeah. 'cause someone's

Jessi: gonna go in and make it their own cameras.

James: Yeah, yeah, yeah. Which is fine.

I get it. But yeah, the personalization just,

Jessi: yeah, it's not so much. I once toured, well it was when I was working for a real estate agent and I was helping to take photographs and this guy had a shark tank that's right in his house. I would imagine like adding a shark tank, big old wall that, that falls, falls into the swimming

James: pools.

Maybe the loser luxury over upgrades. Highly personalized. It's checking a lot of boxes there.

Jessi: What about, what about, what about, there was also this secret passageway from the library and that like

James: hidden, I mean that's cool. That's definitely a lot of value added there. And you like

Jessi: open it and then there's like secret staircase.

That

James: could be cool. Have you seen, I think it's some YouTube guy, it's his channel where like he has totally made his house like super wacky. I think so, yeah. I think I have seen that for kids and it's like, it seems so confusing.

Jessi: Okay. The one upgrade though that I am like, yes, thank you. He put the, he put this like, climbing rope, hammock, uhhuh gym thing up in the lofted ceiling. I'm like, yes, thank you. Because lofted ceilings are dumb. It's a waste of space. Like you might as well just put in a normal ceiling and have more living space, but he created this super cool thing his kids can play on. It's super fun and it's like it's still open.

It's like now that adds value.

James: There you go. Or Smart House doesn't have one. Fair enough. Good point. I know, but would you put that into a rental? Shit, it sounds like a liability just waiting

Jessi: to happen.

James: Just make it webbing ready. He's at your own risk.

Jessi: You, yeah. Just post a bunch of disclaimers. Okay.

James: All right.

Um, there. Or maybe

Jessi: upgrade the flooring to be like padded.

James: Oh, there you go. There you go. Um, and then there's then there's the middle ground, the Invisible Repairs paradox, right. Necessary insulation, but they're not valuable. Yep. Plumbing, upgrades, electrical re wiring, foundation repairs, roof replacement, keeps the value flat and avoids losses, but it rarely equals equity growth.

Yeah. Which is, yeah, it is what it is. Those things

Jessi: are like.

James: We talk about it all the time, essential, but when we're evaluating properties, we're like, oh, it needs a new X, Y, Z. Mm-hmm. It's like, this just doesn't add any value, which we just straight up, we just subtract it from the price. We're like, how much does it cost to replace this roof?

Subtract it. Because you're, you're gonna have to do it, ride to it, and it

Jessi: doesn't. Yeah.

James: Yeah.

Jessi: Yep. Yeah. People, yeah. It's almost like those things that people just assume it's gonna have, like of course it's gonna have a nice roof. And it's like,

James: or more like this is, yeah. But it's definitely something people don't wanna mess with.

Sure. And so you're like, yeah, let's take them, let's take that out. Yep. Yeah, totally. Um, so here's your return on investment formula.

Um,

to remember. So when you're looking at deals and people are talking about their construction plans, here's what to, to think about. Mm-hmm. Number one, functionality.

Does it add usable space? Mm-hmm. That's important. If it does that. Awesome. Visibility is the improvement obvious. That's part of the curb appeal. That's also gets you into the kitchen and bathroom side of things. That gets you away from the maintenance. Yep. Things like foundation repair and then, uh, demand alignment.

Um, does it match neighborhood norms? You're not doing personal taste something people want. Like for you, you would do super bright splashy colors. Each wall would be a different color. Yep. And just like,

Jessi: yeah. Uh

James: uh. It doesn't really work. Majority of people.

Jessi: It's not attracting.

James: Yeah. So, um, and just, I just also like locality matters.

Mm-hmm. Right. A deck in Oregon is not the same as like putting a pool in Phoenix. Sure. And so you kind of gotta like, yeah. You gotta feel it out. What makes sense? Mm-hmm. Um, yeah. So my final question that, uh, that you should. To ask, um, again is, you know, profit or preference, right? Mm-hmm. That's kinda some of the decisions mm-hmm.

You have to make there. And like I said, that's on the, especially on the flip side, oftentimes we're choosing the profit piece of it. Yep. Um, so before you renovate, you want to look at some local comps. You wanna request like an as completed appraisal, which they'll actually do. Mm-hmm. Hey, if you do these repairs, like here's what it'll be worth.

And then you also just wanna calculate that cash flow impact, like, you know, do the math ahead of time and especially for, um. Rentals. You wanna ask yourself, will this raise rent, reduce vacancy, or increase the resale multiple. Mm-hmm. And, um, if not, it's decoration.

Jessi: Yeah. Probably shouldn't do it.

James: Yeah. Yeah. 'cause one builds wealth, the other builds nostalgia.

Jessi: Yeah.

James: So yeah. So those are just active questions that you want to ask that I think most people are like, yeah, I know what to ask it. Yeah. But it's just good to really keep it keep it in mind. So anyways, those are the things that.

Again, as a passive investor, you wanna be looking at those areas and asking those questions.

Jessi: That's good.

James: Cool. I thought that's what I thought so too. Cool. Awesome. So if you also wanna learn about the kind of projects that we're doing which a lot of 'em do involve doing big renovations and things like that, um, you can learn more about that at furlo.com and we have very clear ways in which you can also partner with us while we're doing it.

So, with that, thanks for listening. Have a great day.