WHEN TO RENOVATE A PROPERTY
When should you renovate an investment property?
We asked four experts to shine some light on the question.
RIDHWAN HANNAN – ONEPATH ACCOUNTANTS
Ridhwan says, choosing to renovate should be a practical decision – not one based upon emotion.
All renovations should serve a purpose – they should be done with a specific goal in mind.
“The timing of when you would do a renovation varies,” he says.
“What I always tell clients is that there are two times when you may have to consider renovations by virtue of force.”
“The first one is forced consolidation by the banks,” he says.
“This is where the banks are very particular on how they deliver money to investors.”
In this type of environment, you may have capital or disposable income that you can commit to your portfolio but you still can’t get finance.
Renovating may help you to create additional value for valuation purposes and enable you to increase your rental yield, he says.
In the second situation, you may consider renovating at the end of your investment life cycle.
Say, for instance, you purchased certain properties in the second or third year of your investing. If you are now in the tenth year, those properties would be much more valuable. They probably would have formed the foundation part of your portfolio.
“Since they are tracking along well,” says Ridhwan, “they are often neglected or left to their own devices.”
A renovation may help to increase the rental yield, he says.
This can be particularly relevant if you are nearing retirement or have transitioned to part-time work.
“The specific tax and cash outcome [of the renovation] should be considered to make sure that you are not committing money to something when you could actually be buying another property.”
He says it is worth remembering that value added in through “renovation is going to be inferior to the capital value of buying another property.”
DANIEL YOUNG – BINVESTED
Daniel believes renovations should be done as a last resort.
“The money could be better spent on another deposit rather than increase the rent by $20 or $30 a week” he says.
Daniel feels it’s better to put the cash towards buying more properties. This will generate more capital value and better cash flow than a renovation could in the long run.
“If paint and carpet cost $10,000, I’d rather use than towards another deposit,” he says.
While an investor could do it to increase capital value, there is no guarantee that this will result in more equity being available.
Daniel says he only tends to renovate his properties when they have increased in value a lot and a long term tenant has just moved out. Under this circumstance, a renovation may make it easier to rent it out again.
While he doesn’t favour renovations, Daniel says he always maintains his properties well to avoid costly repairs.
GRAHAM TURNBULL – ZINGER FINANCE
From a finance point of view, If it goes up in value, Graham says you may be able to release equity in order to fund your next property purchase.
He says, it is important to keep in mind what the return will be for the amount of money you intend to spend.
“There has to be a purpose. There has to be a reason why you are doing it,” he says.
NICOLE KEENE – BLINK PROPERTY
When it comes to renovating, says Nicole, “It all depends on what you want to achieve.”
In any case, she says, you should talk to a real estate agent before anyone else to make sure the planned renovation is worth doing.
Speaking to a broker or accountant will be a waste of time if you don’t know whether the renovation will add value and/or allow you to bring up the rent.
She says, there are a few situations in which renovations may be worth considering.
The first is if there is an oversupply of rental properties in the market. If the majority of these are nicely renovated, then your property may be at a disadvantage. In this instance, doing a renovation may help to decrease the likelihood of prolonged vacancies.
Another circumstance where it is worth renovating is if the property is very run down – and possibly unsafe. Renovating will help to mitigate against the risk of the tenant becoming injured.
She says, if you have suddenly found yourself spending big on several maintenance issues, this may be a signal that the property has become run-down.
It is worth considering whether the cost of one big renovation would end up being less than that of ongoing repair work. Once the property has been renovated, you won’t need to spend as much on maintenance for a while.
In terms of timing it right, Nicole says that renovating when the property is vacant will usually allow you to get the job done faster. If you plan on renovating between tenancies, though, make sure you can afford the holding costs.
Renovating should be done as a last resort.
This could be when the property is run-down and becoming unsafe, or when you can’t get further finance without adding value.
If you are at the end of your investing life cycle, renovating may help to increase yield and add value.
Or, if the property isn’t attracting tenants due to an oversupply of nicer ones, a renovation may help to level the playing field.
If long-term tenants have just left and the place is looking shabby, renovating may help to attract new ones.
Whatever reason comes into play, make sure the renovation serves a purpose and that it will add value and increased yield to your portfolio.