Renovating an investment property

Investor appetites for improvements and renovations have waned in recent years. This is due to several reasons; expensive materials and trades, a builder shortage, and challenges associated with rental laws and access to the property.

Increased compliance requirements and rental reforms are forcing many investors to tackle a renovation though.

Ideally, we prefer to select an investment property for our clients that is suitable to rent out immediately. But pending the investor’s appetite for improvements, and the magnitude of vale a renovation could add, we do often consider these tasks.

There is an important rule that we apply to renovations though. If at least two out of three apply, the renovation is worthwhile. But if less than two apply, we prefer to walk away:

1. The cost of the renovation will be equal to or less than the capital value added to the property
2. The appraised rental value will be higher
3. The property will be easier to manage due to a happier renter and less maintenance issues.

The risk of overcapitalisation is real for many investors. Unless a clear plan is scoped, and reliable tradespeople manage the task (on time and within budget), an investor can be at a disadvantage financially.

But scoping a clear plan is not always that easy. How much should you change? What jobs can you personally tackle? How long will it take before a rental income is likely? How much improvement is too much? Can the job be done in several stages in subsequent years? And when does a cheap renovation risk looking cheap?

There are many questions that investors ask themselves at the start when contemplating a renovation. We recommend keeping the following important points in mind;

• Using finances well. Using borrowed funds, (tax deductible dollars) for an investment property is important. A chat with a skilled mortgage broker or an accountant will help if in doubt.
• The deductions and capital costs need to be well understood from a tax deductible standpoint. Information can be found here. It is important to understand the difference between Capital Allowance (division 43) and Plant and Equipment (division 40).
• Ensure the works are compliant. Legal risk, physical risk and being able to insure the property are critical considerations.
• Think about the longevity of the renovation works. Renters are generally tougher on properties than owner-occupiers are, so consider strong materials and styles that won’t date too quickly.
• Can a value-add include transforming a room? And will this overall improve the property?

A recent transformation comes to mind. A client of ours was able to apply a clever, but simple change to add a fourth bedroom. This floor plan below lended itself superbly to this update. We recommended that an excess living space and a glass sliding door were each closed off with basic stud walls. A doorway was introduced off the hall to deliver an optimal floor plan for a family home.

Proportionality is very important to bear in mind, though. If this property didn’t offer multiple other living spaces, we could have risked creating a disproportionate, four bedroom home with insufficient living space.

Placement of living space and ‘wet areas’ is important to note also. We often consider inner-ring cottages, and those which offer open plan living/kitchen at the rear are favoured. Moving or creating ‘wet areas’ is a significant task that can add serious renovation cost.

Sometimes a simple task such as floor sanding and lacquering can transform an old house too. Checking for floorboards under carpet is something that we try to manage, particularly when we can see the potential of the job. Peeling back carpet in wardrobes or lifting out a ducted heating vent is sometimes an option.

A recently updated property of one of our client’s in Melbourne’s north benefited from floor sanding. The before and after photos illustrate the difference this made.

Renovations don’t have to be stressful, nor do they need to be wildly expensive.

Applying a considered process when scoping the renovation is essential though. Leaning on a great property manager to canvas ideas is a great approach too.