Some properties are taking longer to rent, as 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, and even potentially increase the value of your property.
However, renovations often come at a substantial cost. Choosing to renovate should be a practical financial decision – not one based on emotion.
Here’s what you should think about when considering if a renovation makes financial sense.
Improving your property's 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're 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 the ‘easy wins’ are - these are the improvements you can make that will 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.
Increasing the value of your 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.
Your equity 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. This can be an important step in your wealth creation journey, which could help you make your next investment.
Deciding when the right time is to renovate your investment property will be different for everyone, as it really depends on your own financial situation and objectives.
If you're considering renovating your investment property, but don’t want to deal with the banks, Futurerent gives landlords up to 1 year of rental income to help them get ahead.