Should you renovate your investment property?

Worried about the rental market slowing down? Don’t worry, you’re not alone. The rental market in Australia has become much more competitive over the past year. That makes life harder for landlords but there are options to keep your properties competitive.

What’s going on in the Australian rental market? There are several factors:

1. After a long period of rising rents, rates have levelled off. Sydney recorded its weakest growth in four years in 2024.
2. Demand is dropping too. The number of prospective tenants per listing on Domain’s website has fallen to its lowest since 2019.
3. The biggest drops in demand have been for properties that attract medium to high earners.

But it is still a good time to be a landlord. Vacancy rates still sit below 2% across Australian cities. That means if your property is appealing, you are going to get tenants. It’s all a question of how you make your rental property attractive in a way that delivers ROI.

Is renovation the way to do that? A lot of landlords seem to think so. Investment activity was up significantly in 2024, accounting for 38% of new home loans. That’s well above the average over the last decade.

But those loans come with their own costs on top of the renovation itself. If you’re going to renovate or take on an expensive loan, it should be a practical investment decision, not a panic decision in response to a tightening market.

In this blog, we’ll look at your options when it comes to renovation and explore how you can make the most of your investment. 

Improving your property's rental return

Think about investing in your property in the same way you think about buying shares in a company:

• The cost of the renovations is the cost of buying the shares, and
• The additional rent you’ll earn is the dividend paid on the shares.

As a general rule, you should be able to evaluate the value of any given renovation based on the return it gives you in higher rental payments as a percentage of what you invested.

For example, let’s say you have a 4% yield on a $700,000 property. That’s $28,000 per annum.

If you spend $50,000 on improvements and you can generate more than $2,000 in additional rent each year now, that’s eventually going to be profitable. And that’s before you consider future escalations: better tenants and less repairs and maintenance / vacancy. If the improvements resulted in an extra $100 a week, it adds $5,200 per year to your bottom line, a 10% p.a. return on your investment. $200 per week gives you a 20% p.a. return. If you can’t generate that uplift, the investment might be harder to justify.

That’s a useful rule of thumb. Once you have that calculation, you can factor in the increased property value and the possibility of better, more reliable tenants, less downtime, and a lower vacancy rate. All these factors help to maximise your return.

The trick is working out what the ‘easy wins’ are. What are the improvements you can make that will earn you the best return? Where can you get the biggest return for the lowest cost?

The benefits of renovating fall into three broad categories:

1. Aesthetic Improvements: 

Making your property look better is often the quickest and cheapest way to improve your rental return. New carpets and a fresh coat of paint can transform a room for only a few hundred dollars.

In turn, an attractive property brings in more tenants. Many prospective tenants will dismiss a property based solely on the photos they see online, so make sure your house looks at its best and brightest. One study found properties with better photos bring in 40% more inquiries and 26% more rental income. Not bad for a few pots of paint.

2. Functional Upgrades: 

Updating the plumbing, electrics, or appliances can also give tenants reassurance that the property is in good shape. In addition, it reduces maintenance calls and costs. 

The average property requires maintenance of 1-4% of its total value each year. You only need to bring that down by a little to deliver benefits. 

3. Energy Efficiency:

Rising energy costs, not to mention eco-conscious young renters, means that energy efficiency can be another significant boost to the appeal of your rental property. 

There are also potential tax benefits to draw on, so even if reinsulating a home or replacing the windows can be more expensive upfront, the long-term returns can be substantial.

It’s all about balancing expenses against return. A simple facelift costs less, but might deliver less as well, whereas making your property more energy efficient could deliver on rental income, cost savings, and tax benefits.

Imagine the owner of an investment property ($1,000,000 value) investing $40,000 in renovations to make the property more energy efficient:

1. By investing, the landlord increases rental income from $40,000 to $45,200 /year, enough to recoup their investment (at a minimum) in just under 8 years. So far so good.
2. They also reduce maintenance costs, tenant turnover and vacancy, add value, and future-proof the property for years to come. Excellent.

How do you decide what renovation is right for you? Start by looking at other properties ‘to rent’ in your area with roughly the same attributes (beds, bathrooms, parking, location). Are they getting more in rent? Why? You might need to see the property in person or ask your estate agent for advice.

Increasing the value of your property

Just like the investor we imagined above, investing in a renovation also has the potential to increase the value of your property, which means more money in your pocket when you sell.

As a result, many landlords delay renovating their investment property until just before they sell, however there are other benefits that come with improving the value of your property.

Increasing the value of your investment property increases the amount of ‘equity’ (i.e. the value of the property, less the loan you owe) you have in your property.

Your equity, in turn, is a key factor the bank will look at when determining whether you can borrow more money and what interest rate to apply. The more equity you have, the cheaper it is to take out a loan. Interest rates are high right now, so anything you can do to reduce the total interest you pay on a personal loan is going to save you money.

How do you fund a renovation? 

How to finance a renovation depends on the property and the individual. If you have the cash to hand then that’s an easy option provided you don’t need the extra cushion or have other uses in mind for the money, but otherwise you might be relying on expensive, complicated bank loans that undermine your potential returns. 

Generally property investors turn to a cash-out refinance or personal loan to finance renovations - read more on the pains associated with a cash-out refinance here and whether or not a personal loan is right for you here.

If you're considering renovating your investment property, but don’t want to deal with the banks, Futurerent gives landlords up to two years of rental income to help them get ahead. Use the Futurerent calculator to see how much future rent you could access today.

FAQs

1. Should I renovate my investment property?

Yes, if it boosts rental income, attracts tenants, or increases property value. Focus on upgrades with a strong ROI.

2. What are the best types of renovations?

Cosmetic updates, functional repairs, and energy efficiency improvements are most effective.

3. How can I finance renovations?

Use bank loans or alternatives like Futurerent to access rental income upfront with less hassle.