Renovating a property offers the exciting promise of improving your asset value and overall wealth. Before you start, it’s a good idea to consider the benefits and the potential downsides, as well as the logistics involved in getting the project started.
Benefits of Renovating an Investment Property
Rental Income: The ability to seek higher rent on the property once the renovations are complete. It may also attract renters who are happy to stay in the property longer, meaning more income stability.
Maintenance Expenses: A home that has deteriorated will likely result in increased maintenance requests from the renter. Renovating a property before a tenancy starts will mean less maintenance requests and therefore significantly reduce your ongoing costs.
Property Value: The value of the property may increase, leading to more capital growth. This increase in value could potentially build more equity in your property that you might then be able to leverage for further investment
Potential Downsides
Cost: If it’s a big renovation you might need to have the property vacant for the duration of the project, meaning no rental income for that period. Given there are often time blowouts with a renovation, you may need to factor in a lengthy period of no income. When you add to this the unpredictable nature of building costs, it can put a large dent in your bottom line. You’ll also need to be mindful not to overcapitalise and find yourself in a situation where the cost of the renovation is not reflected in the on-completion value or rental income.
Regulations: It’s important to be mindful of any requirements and obligations for your renter, such as notice periods. They may need to find alternative accommodation during the construction period so you will need to adhere to any requirements there. There will also be building and structural regulations that need to be adhered to so it’s important to engage professionals and consult with your local government with regards to permits etc.
If you are going ahead with a renovation, there are certain logistics you’ll need to consider before you start:
• Create a budget based on actual quotes but be prepared for unexpected costs.
• Work out how you will be funding the renovation before you start. If you are going to be seeking finance, make sure that your funds are secured before you commence, as applying for finance in the middle of a renovation can be difficult.
• Carefully select your tradespeople. Get multiple quotes and remember, cheapest is not always best.
• Prioritise the areas that need to be improved before the nice-to-haves.
Before you start any sort of improvements on a property, it’s a good idea to consider what actually needs to be done, versus what is nice to have. Sometimes, just making some repairs and sprucing up what is already there will help improve the value of the home and potential income, without so much risk of overcapitalising.
If you are thinking about renovating your investment property and need some advice regarding your obligations to your renter, please feel free to reach out to enquiries@livingmelbourne.com.au
