If you’re a bit of a data fanatic, no doubt you’ve recently read that some of Australia’s residential rental markets are not performing as well as investors might like.
Experts are blaming a saturation of stock, particularly in and around our major city centres, where a glut of new apartment construction has seen a tsunami of empty dwellings flood the local market.
But that type of insular thinking doesn’t account for how ongoing low interest rates and world economic woes are impacting business and consumer confidence and spending at a broader level… and everything that flows from it.
All conjecture aside, with rent returns flatlining as lenders demand stronger cashflow evidence from potential investor borrowers, now more than ever you need to get a bit creative with shoring up those immediate income streams.
One obvious solution is undertaking a cosmetic renovation to update an older rental investment. But the key to making the numbers work in your favour is to approach such projects with a level head and an understanding of the desired outcomes. Keep these six things in mind and you’ll be ahead of the game…
- The market
Any planned improvements should reflect your tenants’ wants and needs. This isn’t about your own personal tastes. Remember whom it is you’re renovating for.
A neutral, easy maintenance décor will win over too many decorative liberties every time. Tenants have to be able to visualise how their own furniture and life will fit in to the space you create.
A great way to know your market and evaluate their expectations is to speak with your property manager. They have expert insight into what ‘sells’ rental accommodation and likewise, things that might alienate tenants.
- The help
Speaking of property managers, never underestimate the networks of potential help that come with real estate industry professionals.
Don’t forget these are the folks constantly interacting with local tradies and other such people whose assistance you’ll require for your renovation project.
Look to your property manager for valuable referrals to reliable tradespeople, as well as ideas around the types of improvements that will extend your long-term capital gains.
- The numbers
Keep your refurbishments cosmetic and/or functional 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 appealing.
Work out a budget and stick to a strict schedule of works to avoid time and financial blowouts that could cost more than you’ll walk away with.
- The quality
Spend where it counts and can be easily seen, but also where the benefits may be subtler. A quality rental property should not only look engaging, but also feel comfortable to live in.
That being said, it’s critical to keep the purse strings reined in to avoid negatively impacting your end profit margins with unnecessary luxury purchases. Just don’t be tempted to start cutting important corners.
It’s also a good opportunity to update old appliances if they’re starting to resemble relics from last century. When tenants see a modern, crisp finish it suggests a landlord who considers their comfort and personal safety paramount.
- The project
Precise project management is essential if you hope to tick those last two points off your rental renovation checklist.
The longer it takes to complete renovations, the longer the property is failing to generate an income. It’s costing you money!
Think about hiring a professional project manager who can coordinate tradespeople and oversee work to get the job done on time and to budget, or take on the role yourself if you have the necessary skills and confidence.
- The depreciation
The rewards reaped from a rental renovation don’t end once you’ve marketed the new-look premises and secured a fantastic long-term tenant.
Arrange for an updated depreciation schedule from an appropriately qualified quantity surveyor upon completion of the renovations.
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 provide investors with a significant boost to your cashflow position and the long-term sustainability of your portfolio.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).