5 Considerations When Renovating to Boost Rental Income
Real Estate Know-how
30 November 2016
Renovating an existing property can significantly boost your cashflow. These considerations help you get it right.
Cash flow is as important as ever these days, with lenders making a lot of noise about increased serviceability restrictions due to regulatory policymaking.
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? Your improvements should reflect your tenants’ wants and needs, rather than your own personal taste, and include a relatively neutral décor that can accommodate virtually any style of furnishings.
The best way to evaluate expectations among your tenant pool is to speak with your property manager about your plans. We have unique insight into what ‘sells’ rental accommodation in our specialist areas and likewise, the things that might alienate tenants.
We also have the necessary industry expertise and networks to assist with referrals to reliable tradespeople, as well as ideas around the types of improvements that will extend your long-term capital gains.
2. Avoid over-capitalising
Never purchase a ‘renovator’s delight’ without first arranging a qualified building and pest inspection, so you know what you’re getting into.
The idea is to keep any refurbishments cosmetic and/or functional in nature wherever possible, avoiding costly structural work that can take a hefty bite out of your budget, but 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 where you can, but don’t skimp on the important stuff.
By all means, pull in the purse strings wherever possible as this can mean increased end profits, but only if you do so in areas that won’t negatively impact the end product.
Make sure your finish reflects a quality renovation. Don’t be tempted to cut corners, such as replacing all the kitchen cabinets and benchtops, but keeping the old, grimy tiled splashback to save a penny or two.
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 landlord who considers their safety and comfort.
4. Manage the project precisely
The longer it takes to complete the renovations, the longer you’re without any income from the property. You need 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, make sure you 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 portfolio.
We’ve seen instances where property investors have turned their previous year’s $2,600 tax bill into a $12,000 return in the next financial year, just through having a depreciation schedule drawn up.
If you would like further industry insights and expert guidance in completing a renovation project for property investment profits, why not contact the team at Little Real Estate?
We know what tenants want and can provide important market knowledge and industry contacts to ensure your project’s success. Contact us today to find out how we can help.