The Northern Colorado economy is making it more difficult to find qualified tenants for condos, duplexes and single-family homes, according to local landlords and property managers.

Properties have been available for two months and some longer, and not getting a lot of calls. It’s pretty slow for which a lot of it is just that peoples incomes have changed.

The economy is lowering many peoples incomes and nicking their credit, making it harder to find qualified tenants. The Fed’s Regional Economic Survey showed sluggish consumer spending and a sharp contraction in the Oil and Gas Industry with limited activity in Colorado due to low natural-gas prices.

Some landlords have recently made improvements to their property and lowered the rent in an attempt to rent it. Others are offering a free rent for up to 2 months and yet some are offering a cash rebate at the lease signing.

You hear stories like, “We don’t usually have trouble renting it,” “We began advertising the vacancy and even though we have received a similar number of calls as we did a year ago its still remains vacant.”

Many people are asking if the landlord accepts Section 8 vouchers, a federal program that helps very low-income families rent from private owners. Many are not qualifying because of income or credit problems.

Businesses continue to reduce their expenses. Labor is the largest expenditure on most Profit and Loss statements and employees are asked to take furlough days and some are forced to join the unemployment ranks.

I think rental vacancies are close to peaking but reducing the number of vacancies seems really tough. Tenants are shopping for value (filling their needs inexpensively).

Some landlords have bent a little more to fill vacancies and others are working more with current tenants who may have fallen behind on their rent, creating a plan to let them catch-up instead of simply evicting them.

While others are negotiating a new lease agreement with reduced rent collection but extend lease cycle. The thought process is to try to make a win-win for everybody.

This could be the solution needed to get through these tough times but if your tenant vacates then use venues that deliver a great presentation to the widest audience at a minimum price such as the product and services offered at Rentmarkets.com where together with you their mission is to fill your vacancy!

Put aside the notion that you can expect to receive a predetermined rate of return from a remodeled rental unit. Perhaps you’ve been told, for instance, that a remodeled kitchen will pay back, say, 80 percent of its cost, a remodeled bath maybe 60 percent of its cost, or updated fixtures perhaps 30 percent of its cost.

This is not necessarily true.

To make money at real estate investing, you should never rely on any of these specific payback figures, and instead, learn to evaluate every rental property and every remodeling project on its own merits.

Always keep in mind that your profits relate directly to the degree that your tenants or buyers value your units. At the end of the day, regardless what you spend to remodel, your property improvements are only as good as the price someone is willing to pay for them, and these relative comparisons differ in time and place.

As such, before you make any improvements to your rental income property, research competing properties and tenant (buyer) preferences. Learn what you need to do in order to achieve competitive advantage. Think twice about making any property improvement unless it’s sure to attract tenants willing to pay higher rents or buyers willing to pay your desired higher price.

How to Make Your Budget

Start by developing a cost/income estimate. Research the resale prices and rent levels for rental properties in your local real estate market. Figure out how much you can increase the sales price or rents resulting from each project you undertake, decide on a rate of return, and then compute your budget, which, of course, can vary enormously depending on who does the work, what materials are selected, and the skill with which the job is undertaken.

For our purposes, we’ll assume you want to achieve a 20 percent overall rate of return on the capital invested for the remodel. In this case then, every $1,000 you invest in improvements should increase your net operating income at least $200 a year.

Real estate investors, naturally, can choose whatever rate of return they desire. For instance, some investors might be pleased with a 10 percent rate of return, whereas others may aim as high as 40 percent. What matters most is that you curb your enthusiasm with a realistic look at the amount of increased rents your investments of time, effort, and money are likely to produce before you renovate.

Likewise, creating a budget helps prevent you from over-improving your property. The thing you don’t want to do is to spend money for costly improvements that are not relative to the neighborhood and relative to the prices and rent levels your buyers or tenants are willing and able to pay.

Okay, let’s consider an example and then make the calculation.

After you survey the local rental market for the top rental rates in the neighborhood relative to the size and quality of units you intend to remodel, then apply your rate of return and compute.

Let’s say you feel after renovations that you will be able to raise rents enough to pocket another $150 a month per unit. By applying the 20 percent rule, you would determine that you must limit costs to no more than $9,000 per unit.

$1,800 (12 X $150) / .20 = $9,000 cost of improvements

Again, you have the option of plugging in whatever rate of return you desire. The important thing is to run through your numbers thoroughly enough to be satisfied that your local real estate market actually supports the selling price or rent level you intend to ask.

An Exception to the Rule

Real estate investing is about making the greatest return on your real estate investment as possible and therefore explains the purpose for writing this article about returns on improvements. Still, on some occasions you may want to invest more in your improvements than rent increases justify for other reasons.

To attract a better quality of tenant, for example, or to reduce tenant turnover, cut losses from bad debts and vacancies, or just to have a greater pride in ownership. In these cases, real estate investors simply have to weight trade-offs.

The most crucial thing for you is to crunch the numbers, regardless. Remember, good tenants and pride of ownership benefits you only if you’re collecting enough rents to pay your property expenses and mortgage payments, and you don’t want to be left having to feed your property just to pound your chest whenever you drive by.

One Last Word

It’s probably a good idea to categorize property improvements into those you can do, and those you would never want to do.

For example, whereas it might be okay for you to tackle some cosmetic improvements such as painting, landscaping, carpets, and light fixtures, you must exercise extreme caution when it comes to roofs, foundations, wiring, and plumbing. These types of renovation can be inundated with hidden costs, and unless you pay a price favorable enough to make these types of improvements, you might discover that the amounts you spend to improve the property and its value (or rent levels) after you’ve completed the work aren’t profitable.

Smart real estate investing requires you always analyze the financial details of the deal in front of you before you do anything.