Is it worth renovating an investment property?
The key to answering this question is to look at the return on investment you will receive.
We'll take you through the math behind making improvements and hopefully show you why renovating your rental property can be one of the best investments you will ever make.
Some owners think it’s not worth bothering.
Reasons not to renovate include:
- "It’s a rental property. If I put new chattels and fixtures in there they will just get worn out anyway. Why bother upgrading it?"
- "If I upgrade my rental property it’ll be nicer than our own home!"
- "I don’t know enough about renovating. I’m not sure who to talk to or where to start."
We’ll answer those questions before the end of this post. But first…
Do you know how to work out the potential return on improvements to your investment property?
The easiest way to do it is to estimate the rent increase per year after improvements are complete, and divide that into the cost of the renovation.
For example, imagine you renovate your kitchen between tenancies and spend $7k. We’re not talking a brand new kitchen here, but maybe a new benchtop, a new stove and a repaint of all the cupboards and walls.
As a result, you are able to obtain a higher rent. Let’s say, $20 per week.
To work out your return, calculate the rent increase over a whole year ($20 x 52 weeks = $1,040). Now divide that into the cost of the renovation ($7k) and you get 0.149. You can look at this as a percentage (or just multiply by 100) = 14.9%.
You have also increased the value of your investment property, often by more than the cost of the improvement.
It's hard to find a better return on your money than that!
Let’s run a few more examples to see what sort of return you could get by investing in improvements.
Let’s say you spend $3k on new carpet and as a result, you can increase your rent by $10 per week.
$10 per week is $520 per year. $520 / the initial investment of $3k is 17%. So by investing $3k you are earning $520 per year. In other words, you are earning 17% on your money.
How much more rent could you earn if you upgraded your kitchen & bathroom? Let’s say you invested $15k but could achieve $50 more per week in rent. That’s $2,600 per year, which is a 17% return on your original $15k.
Let’s say you could add a garage for $25k, but could earn an extra $50 per week in rent as a result. That’s an extra $2,600 per year, or a 10.4% return on your initial investment.
Not only that, you are adding value to your property at the same time.
Key points to be aware of:
Based on the numbers above, it would appear that renovating your investment property can be a really good investment. There are some key details to consider though:
- The initial value of your investment is held in the property. You can’t easily take the money out again if you need it like you could with a term deposit. You can possibly refinance, to release the equity at a later stage, but that can be a time-consuming process.
- The value of the renovation drops over time. If you add a new kitchen, you might need to replace it again in 20 years.
- Improvements like a garage may provide a lower return but will last a lot longer.
Before you go, let’s cover off those initial objections:
Reasons not to renovate include:
Owner: "It’s a rental property. If I put new chattels and fixtures in there they will just get worn out anyway. Why bother upgrading it?"
Answer: Because they increase the value of your investment property and you can earn a return on your investment.
Owner: "If I upgrade my rental property it’ll be nicer than our own home!"
Answer: This may be true, but you can’t charge rent for improvements to your own home.
Owner: "I don’t know enough about renovating. I’m not sure who to talk to or where to start."
Answer: You could look at hiring a property manager to manage your investment. They have a collection of tradespeople who will do small jobs at short notice. Alternatively, if you want to keep managing the property yourself, you could ask friends for a recommended builder. Or reach out to our team and we can do our best to put you in touch with people we personally use.