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The goal of an investment property is simple; achieve the best possible return on investment. This can happen through rental returns and in the long run, capital growth.
Savvy investors are always looking for steps they can take to ensure that their property is providing them with the best return. This type of proactive approach to enhancing your investment is a bold strategy that has great potential to boost your property portfolio but can come witha substantial cost.
As with any major decision though, it is important to consider the positives and negatives that performing a renovation can have, both financial and personal. It is only when these have been thoroughly considered and researched that you should feel comfortable coming to a decision.
By taking the path of renovating their investment property, an investor is being proactive in their approach to improving their asset. With this proactive approach comes some potentially very attractive monetary benefits.
Firstly, the completion of a successful renovation can improve upon the rental stock of your investment property. Some examples of renovations that can boost the value of your property are:
Through these, an investor is capable of inflating the asking rental price due to the improvements they have made.
It can also allow them to create some equity thanks to an increase in rental yields.
Another benefit that comes thanks to renovating regarding renting is that it is possible to attract a better quality of tenant. With a better-quality tenant can come a reduction in prolonged vacancies and loss of rent, something that all investors aspire towards.
A further financial benefit to an investor that comes with renovating an investment property comes in the form of capital growth. Renovation is a way you can potentially artificially boost your property’s value that it would not have been able to achieve by waiting for it to simply appreciate over time.
If you do decide to eventually sell your investment property, the capital gains that you make can be very lucrative if you bought it for a cheap price. However, any capital gains you make can be subject to tax as it is not your primary residence.
Aside from the financial benefits, there can come a great sense of accomplishment with the completion of a renovation. Even though you are not living in the property, the fact that your hard work has enhanced your investment is something that an investor should be proud of.
The most obvious negative to renovating your investment property is the loss of rental income that occurs when you decide to renovate. Depending on the scale of the renovation that is being planned, you could potentially lose your investment as an income source for some time.
To counter this, it is vital that you manage the renovation of your investment property with great attention to detail so that the process can go as smoothly as possible.
This is, however, sometimes not possible. Everyone has heard stories of renovations that can haunt the nightmares of any ambitious property investor. Costs can spiral out of control; council regulation and restrictions may limit your plans from coming to life and delays can have a serious effect on your budget.
Renovation can be very unpredictable, even seasoned renovation experts can suffer from the unexpected.
While renovating, it can be tempting to rip everything out; start anew and really go all out towards re-imagining your investment. However, this can have a potentially negative effect on the value of your rental.
When throwing out the older things from your investment property, you may be losing out on the potential depreciation that those items will have incurred come tax time.
By getting a depreciation schedule before your renovation begins, you can keep track of the items and make a claim on them.
Getting a depreciation schedule done after you have finished renovating your investment property can be a good step to take also. By doing this, you can begin the process of claiming on all the new items that you have now installed.
For more information about depreciation and the laws around it, the Australian Tax Office offers all the information that you could need. It is important to remember that investment property renovating will influence your tax deductions.
One final point to remember is that renovating can be an extremely stressing time that can put a strain on all aspects of your life. It can consume your time, money and your attention. This is why it is vital to plan and research comprehensively before committing to the idea of renovating your investment property, let alone starting the process.
It’s always going to be hard work. However, with patience and the right approach an investor could potentially enhance their property portfolio for the better.
A key element to getting a better result is to understand the future demographics you are renovating for. After all, you are upgrading your property for them and not for you.
One thing that can influence potential renters is the suburb a property is located in. Certain suburbs will attract certain demographics depending on what the local amenities are like. Proximity to schools, shopping districts and parks are very attractive for renters with families for example.
The size of your property will also heavily influence the people that are interested in renting it.
Some renters may even rent a property for the general look of the architecture that a suburb has or for its leafy-lined streets. If you are renovating your investment property and may be able tap into the aesthetic of the suburb, prospective renters may find your property very attractive.
To research this, you can walk around and examine the architecture in the suburb. Going to a few open inspections is a great way to also see what a well-done renovation should look like.
To recap, you renovate your investment property to make it more profitable. With a better quality property, comes the prospect for potentially better quality renters.
Though there may be positives and negative to renovating your investment property, your individual situation and personal circumstances will be unique to you. Talk an expert about what is best for you in your situation.
Disclaimer: The information in this publication and the links to further information within it are provided for general information only and should not be taken as constituting professional advice from Little Real Estate. You should not rely on the accuracy of this information and should seek independent legal, financial, taxation or other advice to check how any of this information relates to your unique circumstances. Little Real Estate is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, or from our website
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