HOW TO RENOVATE AN INVESTMENT PROPERTY AND GET RETURNS
The decision to renovate an investment property can improve your rental yield and manufacture some equity.
It can also help to attract and satisfy tenants – reducing prolonged vacancies and loss of rent.
But, many people fall into the trap of either spending too much, or, not doing enough to get the most value from their renovations.
Here’s a guide of what to do (and what not to do!) when renovating an investment property.
UNDERSTANDING THE TARGET MARKET IS THE KEY TO GETTING VALUE OUT OF A RENOVATION
A fast food restaurant wouldn’t introduce a seven-course degustation menu for its customers. They know their clients just want cheap food that hits the spot, without the frills.
When renovating an investment property the same principle applies. It is essential to know your target market of tenants. Are they mostly families, students or professionals? What do they value most in a rental property? How much would they be willing to spend each week for a brand new kitchen and bathroom?
If a complete cosmetic renovation will only bring in an extra $5 each week in rent, then it is not worth doing?
Targeting your renovation towards your ideal tenants will ensure you attract more interest. Increasing demand may enable you to charge at the higher end of market rent for the area.
A GOOD PROPERTY MANAGER CAN HELP YOU PLAN AND EXECUTE YOUR RENOVATION
Sounds good in theory, but how do you find out your ideal rental demographic? A good property manager, should be able to tell you this. They can also guide you on what you can do to get the most value out of a renovation. They can recommend a choice of materials, colours, style and functionality.
They can even manage the project for you, ensuring you stick to budget and that things run according to plan.
However, few property managers do this…and even fewer do it well. Make sure you have a good one working with you with a track record of results!
A COSMETIC RENOVATION SHOULD BE FUNCTIONAL AND APPEALING
Don’t go over the top with your renovation. There’s no point spending thousands of dollars on a granite benchtop when a new laminate one will do just as well. The main focus should be making the property look appealing while at the same time being functional as a rental property.
Choosing neutral colours and a more classic, basic style will attract a wider range of tenants. It will also protect your property from looking outdated ten years down the track, eg think 80’s pink. Yuck!.
MyDeal.com.au has a few good tips on simple improvements you don’t need a professional for.
A NEW BATHROOM OR KITCHEN CAN ADD THE MOST VALUE
The mains hubs of a property that have the biggest impact are the kitchen and bathroom.
A newly renovated kitchen and bathroom can add capital value to your property as well as make it more attractive to tenants.
New flooring, and a fresh coat of paint, new door handles, window furnishings and light fittings can also make your property look attractive and new without costing a fortune.
BE COST-EFFECTIVE AND CHOOSE VALUE OVER LUXURY
Getting the most bang for your buck is important. After all, you are doing this to add value and increase yield. Renovating to add value is about making money – it’s a business transaction, not an emotional choice.
It is important to salvage what you can during the renovation. For example of a kitchen can be spruced up by replacing the benchtop and sink. If the internal cabinets are in good condition them keep them. Choose to spray paint the doors with gloss and replace the handles instead. Taa daa! The effect of a brand new kitchen – at a much cheaper cost.
Similarly, if you are renovating your bathroom you can have your bath and sink refinished rather than replaced. This would be a much cheaper and quicker option but it would still hold the potential for greater rent.
REGULAR MAINTENANCE CAN PREVENT AGAINST SPENDING BIG ON MAJOR REPAIRS DOWN THE TRACK
Preventative maintenance is important to ensure no major jobs need doing further down the track. For instance, redoing silicone between sinks and splashbacks can prevent mould and wood rot problems which can be very expensive to fix.
Routine inspections can help property managers identify what maintenance needs to be done in order to prevent costly damage. Don’t rely on your tenants to flag issues on their own accord, they often don’t know what to look for.
It is better to attack problems before they happen – spending thousands of dollars fixing things won’t add to the value of your property. Prevention is better than cure.
HOW MUCH SHOULD YOU SPEND?
As a guide you shouldn’t spend more that 7% to 8% of the property’s current value on a cosmetic renovation, and no more than 3% on the bathroom and kitchen.
The most important thing to remember is to do it strategically. The aim is to add value and increase cash flow – not make it look good just for the sake of it.
Nathan Birch, Director of BInvested, says if he spends $20,000 on a renovation, it is with the calculated aim of increasing the property’s value by $40,000 to $50,000.
In terms of cash flow, he would aim for a return of 15-20%.
“So, if I’m spending $20,000 on the renovation, I want to see another $3,000 or $4,000 a year of rent coming in,” he says.
“You don’t want to be doing it if it’s only going to be giving you an extra $5 a week,” he says.
Blink Property, the investment property management specialists recently entirely overhauled a 2 bedroom unit for just $17,000! The price included a full repaint, new AC, new carpets throughout, new kitchen, new main bathroom and a new ensuite. The renovation added $80,000 in property value and $120 a week extra in rental value. Check out the renovation video below.
WHAT NOT TO DO:
• Don’t use dodgy tradespeople – possibly easier said than done, but make sure you employ trustworthy tradies who charge a reasonable price. Get at least three different quotes and choose the best person for the job.
• Don’t take shortcuts – if you are going to do it, do it right – otherwise you’ll probably end up spending even more further down the track.
• Don’t do the bare minimum – just making one improvement can have the power to highlight how run-down the rest of the place looks. Make sure you renovate to make the property look appealing overall.
• Don’t renovate to your own tastes –an orange feature wall may be something you have always wanted, but it’s not for everyone. Use neutral colours that create the effect of space and will also appeal to a majority.
• Don’t over spend on luxuries – choosing middle range appliances over the most expensive brands will add just as much value and functionality to your property but they won’t cost as much. Remember, there is always wear and tear in a rental property and tenants may not be as careful as you would like them to be.
• Don’t do it without a plan – work out your budget, project how much value you will add and make sure you are getting a good return. Get every quote itemised and scrutinise what you are spending on. Organise the renovation properly to avoid costly delays leading to lost rent and budget blowouts.
• Get the job done well – doing it the cheap way can end up doubling costs. Focus on getting quality work done at a reasonable price.