Should you renovate your investment property?
28 October 2019
Properties are taking longer to rent and the building boom over the last few years has made the market more competitive. Taking a proactive approach by renovating your investment property can improve your rental return, or increase the value of your property, however renovations come at a substantial cost. Choosing to renovate should be a practical financial decision – not one based on emotion.
Here’s what we think about when considering if a renovation makes financial sense.
Improving your rental return
Think about investing in your property like 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. For example, if you are considering spending $20,000 on some kitchen and bathroom improvements and you expect this will earn you an extra $50 each week in rent, that equates to $2,600 in additional rent each year, which is a 13% return each year on the $20,000 investment. The trick here is working out what are the ‘easy wins’, or the improvements you can make that earn you the best return on your investment. Practically, one of the best ways to do this is to find other properties ‘for rent’ that have the same core attributes (e.g. beds, bathrooms, car spaces and location), but are commanding a slightly higher rent. Often this will involve actually going to see the property in person at the open for inspection, so you can get a real sense for the condition of the property and why it’s getting a higher rent. If you don’t have the time, asking your real estate agent for advice is often a good shortcut.
Remember - your return is about income and expenses, so don’t forget the expenses side of the equation and the cost of vacancies. Better-quality tenants can reduce prolonged vacancies and help ensure your property is taken care of.
Improving the value of the property
Investing in a renovation 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, which is a key factor the bank will look at when determining whether you can borrow more money. Your borrowing capacity is driven by the spare income you have to make interest and principal repayments and the amount of equity you have to invest. Increasing your investment property income can boost your spare income and equity in the property, which can be an important step in your wealth creation journey and help you make your next investment.
There is ‘no one size fits all’ approach when it comes to ‘when’ is the right time to renovate your investment property as it really depends on your own financial situation and objectives.
If you are considering renovating your investment property, but don’t want to deal with the banks or borrow money, FutureRent offers landlords a better way to pay for life’s bigger expenses and opportunities, by giving you early access to up to $60k in rent upfront. Find out more here.Disclaimer: Please note that the information on this page is general information only and should not be taken as constituting professional or financial advice. FutureRent is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information on this page relates to your unique circumstances. FutureRent is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.