Five points when renovating to boost rental income
20 August 2019
Renovating an existing property can significantly boost your cashflow. These considerations can help you get it right.
Cash flow is as important as ever these days as investors look for ways increase returns in this economy.
Renovating an existing property investment can mean the opportunity to significantly boost your cashflow, without necessarily having to extend your existing debt threshold and jump through multiple hoops to obtain a mortgage.
Further, it provides an immediate increase on your yield, as well as continued long-term benefits by way of manufactured equity and depreciation claimed over the asset’s life cycle.
That’s if you get it right. Get it wrong however, and you could be in for a whole world of pain as your property investment turns into a money pit of infinite problems.
Here are five key things seasoned investors, who’ve successfully tackled the odd fixer-upper or two, consider essential to making a renovation project work.
1. Know your market
Who are you renovating for? It can be a good idea for your improvements reflect prospective tenants’ wants and needs, rather than your own personal taste. For your investment, include a relatively neutral décor that can accommodate virtually any style of furnishings is a great step.
The best way to evaluate expectations among your tenant pool is to speak with your property manager about your plans. They can have a unique insight into what ‘sells’ rental accommodation in their specialist areas and likewise, the things that might alienate tenants.
Your property manager also has the necessary industry expertise and networks to assist with referrals to reliable tradespeople, as well as ideas around the types of improvements that could extend your long-term capital gains.
2. Avoid over-capitalising
To over-capitalise when renovating is to improve your property beyond its resale value. In other words, you spend more than you will be able to make back when you sell the property.
Ideally, most investors will be aiming to keep any refurbishments, cosmetic or functional in nature, from being too costly as structural work that can take a hefty bite out of your budget. It can also provide little in the way of extra value or rental income.
Aesthetic and useful improvements, like a modernised kitchen and bathroom, along with new carpets, light fittings and soft furnishings are visible enhancements that will make your property more desirable.
Establish a concise budget and importantly use a strict schedule of works to avoid time and financial blowouts that could cost you more than you stand to make.
3. Save but don’t skimp
By all means, try to save on money wherever possible as this will keep money in your pocket, but only if you do so in areas that won’t negatively impact the end product of a renovation. Make sure the final product reflects a quality renovation.
Don’t be tempted to cut corners. Replacing all the kitchen cabinets and benchtops but keeping the old, grimy tiled splashback to save some money can visually undo all your hard work.
This is also a good opportunity to update things like kitchen appliances, heaters and air conditioners if they’re starting to look like relics from last century. When tenants see a modern, crisp finish it suggests a owner that looks after and cares for their investment property.
4. Manage the project precisely
The longer it takes to complete the renovations, the longer you’re without any income from the property. It can be best to either hire a professional project manager who can coordinate tradespeople and oversee work to get the job done on time and to budget, or establish yourself in this role and take it very seriously.
5. Don’t forget about depreciation
On completion of the renovations, one thing you can do is arrange for an updated depreciation schedule from an appropriately qualified quantity surveyor.
Many of the new items you purchase to replace the outdated ones in your investment can be claimed at the end of each financial year, over the life of your asset.
These tax savings can really add up and represent a substantial boost to your cashflow position and the long-term sustainability of your overall.
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