How to renovate your investment property to unlock value and more income
As a landlord, it can be tempting to simply maintain the status quo when your tenants are paying their rent on time.
But by being more proactive with your property, you could achieve anywhere from a 30 to 50 per cent increase in rental income by renovating and refreshing the property.
The benefits of renovating your rental will not only improve your rental return and increase the value of your property, but attract and secure long-term, high quality tenants while reducing maintenance and repair costs.
The Agency Inner West’s Martin Muscat, Senior Team Leader in Property Management, has achieved higher rental incomes for numerous clients. An avid renovator and property flipper himself, Martin estimates about 80 per cent of the properties in his large portfolio have undergone some kind of renovation in the last 8 years.
He lists the numerous benefits his landlords have seen after undergoing renovations.
“An a-grade property means an a-grade tenant,” Martin said.
“Tenants are much more inclined to sign on the dotted line than if they are securing a renovated and modernised property. There are far less maintenance costs, plus tax benefits involved for the owner and adding value to a capital asset.”
Working out your return on investment
The first thing Martin does when presenting a renovation to a landlord is to outline the numbers.
The idea of forking out $20,000 for basic cosmetic renovations has many landlords baulking, but Martin finds once he explains the benefits of a renovation in terms of a return on investment (ROI), it’s easy to see the benefits.
The ROI is the ratio of profit you make from the increase rent to the cost of the renovation. For example, let’s say a property is currently bringing in $500 per week of rent. A basic $25,000 renovation could bring in an extra $100 per week of rent, bringing the ROI is 20.8 per cent per year ($5200 / $25,000).
From an investment perspective, $25,000 spent on increasing the value of a property works out to be a smarter investment than that money sitting in the bank, Martin says, where the interest rate a bank can offer maybe 2 to 2.5 per cent.
Kitchens sell properties, advises Martin Muscat.
Prioritise the essentials
No matter how big or small the budget, all types of renovations or additions to a rental property will have some impact. Prioritising things like replacing old appliances and fixing structural issues will improve the comfort and functionality of your property.
“Older units in Sydney that were built in the 1960’s, for example, don’t have things like built in wardrobes or dishwashers. Many landlords will say that a tenant could pick up a wardrobe from Ikea, but they don’t realise that tenants have so much choice these days and will often just move to the next option. A built-in wardrobe fit out can cost as little as $1200.”
Refreshing the paint, light fittings, carpets and blinds are the first things to look at when making cosmetic changes.
If budget allows, the next big ticket item would be air conditioning. In the Australian climate, it’s almost a non-negotiable says Martin.
“At a minimum, I advise landlords to look at putting a split system in the living room and ceiling fans in the bedrooms. A split system air conditioning unit can start from $1300 fully installed to $2500.”
Next would be renovating the kitchen – “Kitchens sell properties,” says Martin – and updating flooring. Tiles or hybrid flooring is the smart option, making the home pet friendly and easy to maintain for families.
“Tiles and hybrid flooring attracts tenants with families, who will often rule out properties with carpet. Plus, it can allow landlords to make the property pet friendly, attracting more rent and opening up the property to a wider range of people,” says Martin.
The bathroom renovation generally comes last, as most tenants are happy to live with an older but tidy bathroom especially in an art deco or mid-century style.
“You can get away with a spruce up for a bathroom like resurfacing tiles which can cost $5000. Otherwise you can spend very little in getting a new toilet seat or toilet suite, vanity, shaving cabinet and new shower screen which will go very far in transforming an old bathroom.”
A renovator's checklist:
1. Paint, light fittings, carpet and blinds. New toilet seat or toilet suite for the bathroom.
2. Wardrobes
3. Dishwasher
4. Air conditioning
5. Full kitchen renovation
6. Tiles or hybrid flooring
7. Full bathroom renovation
Your property manager can prove to be a huge asset in ensuring increased rental returns. They can be a valuable source of knowledge on maximising rental yield and attracting the right tenants for your property. The Agency's Property Management pillar are party of a truly national business, our reach extends from coast to coast. This affords us an unparalleled depth of knowledge in every market across Australia.
Get in touch with The Agency Property Management team today.
By Azal Khan.