Adding equity to your property might not be possible for your investment, but renovating to get more rent could make a lot more sense if you have a negatively geared property and want to make it possible – but what does this all mean? Negative gearing is when
Negative gearing is when property is losing money for a taxable loss. Positive gearing is when you’re making a gain and a surplus after expenses – i.e. you are getting more rent into your account (income) then you are paying out (in expenses). The reverse when you are paying more out than you are getting back in is negatively geared, and has some tax advantages. So how do you turn a negatively geared property into a positively geared one and add cash flow to your monthly income? Here are our top 7 tips to do this and put more money into your pocket at the end of the month.
What are the main points?
- Negatively geared property means you are making less money than the property is costing you, whereas positively geared property is making you more money than it is costing you, leaving you with a surplus.
- Negative gearing has some tax advantages but is based on speculation that the property will appreciate in value which may not always be the case.
- You should treat an investment house as a house, not as a home. Never over renovate a property, if it doesn’t add capital value or rental it may not be the smartest allocation of capital and remember the property doesn’t need to be picture perfect.
- It may not cost any money to add cash flow and extra rent to your property, think about being pet-friendly or even doing a spot of gardening to improve the street appeal, or you could consider refinancing where banks will pay you to move to them.
Tip 1: Quick ways to increase rental
There isn’t any beating good old fashioned elbow grease! It’s amazing what can be down with some sugar soap and a few scrubbing brushes, for $10 you could wash all the walls internally and make the place come up as good as new. If that doesn’t do the trick you can try repainting the walls, depending on the size of the property paint is going to vary in price – remember as a rule of thumb one litre will usually cover 15 square metre of walls – so 5L of white ceiling paint (to cover about a medium sized bedroom) will cost $35. A 4L low sheen white wall paint will cost around $55, and a 4l low sheen acrylic kitchen and bathroom white paint will be around $60 – you can add your colours when you buy the paint.
Some other simple cosmetic renovation ideas include:
- New floors
- Replacing light fittings and fixtures
- Replacing door and cabinet handles
- Adding a splashback to the kitchen sink
- New blinds or curtains
- A quick lick of paint on the front facade
- New plants in the garden or new fencing
- Replacing (or painting) bathroom tiles
- Change of colour scheme to freshen up the place
Adding air-conditioning and dishwashers is a must. Property manager David Laverty from Red & Co rentals believes “it can add as much as $20 per week” to your rental income. He added, “across our rentals, we find small improvements like redoing carpet every 5-10 years makes sure the property feels fresh and attracts the best quality tenants”.
Tip 2: Add a bedroom for extra rental
Are there any large rooms that can be split? Adding a wardrobe or replacing cupboards may add extra rent. You can even try going to Ikea and putting in some simple and smart storage solutions to make the most of the space you already have.
Tip 3: Furnish and Pay TV
Have you thought about renting the property fully furnished? You could try furnishing the property or adding small things like Foxtel or Internet to appeal to a difference range of clients. Typically you can attract up to $200 a week extra if the property is fully fitted out with furnishings and ready to move into.
Tip 4: Street appeal
First impressions go a long way, make sure your property has street appeal. If you have a garden make sure it’s in good condition and you’ve mowed and edged the grass, no-one wants to trek through long grass before they have even walked into the place!
Tip 5: Consider Being Pet-Friendly
Something most people don’t even consider is being pet-friendly, but we find this is a rapidly growing segment of the rental market. Pet owners are often willing to pay a premium rent to secure a place that will let them have their pet, you just need to make sure you have a make good provision for any external or garden damage but this can be a very simple and easy way to increase your rental income almost overnight – as well as access a large pool of good quality tenants who also love their pets!
Tip 6: Repair before you replace
Another rookie mistake is that landlords rush in, clean out the place, give it a quick repaint to get the property rented out as soon as possible – but remember doing these sorts of repairs aren’t always critical, and may not necessarily increase your rental income straight away. You might be able to put off some of the repairs, including –
- The general rule of thumb most landlords will follow with carpets is to replace them every 7 years. Though I think this is a good guide to follow, try cleaning the carpets professionally before you invest in new ones, it generally will have the same result but will only be a fraction of the cost.
- In very rare cases, ceilings need to be painted unless your previous tenants were heavy smokers or didn’t keep the kitchen in the best condition.
- The magic eraser is a great tool to consider using on the walls before painting over them. It helps you to get rid of all fingerprints and excess, and allows you to get the best possible finish.
Tip 7: Reduce Costs
With all investments, to improve the profitability you can either increase the revenue (rental) or decrease the costs (mortgage and expenses). A quick way to increase cash flow could be to have a mortgage broker, like Red & Co finance team, to see if you are paying a rate that is within the current market. Jayden Vecchio, Director of Finance at Red & Co says, “we see this all the time. If people have been with a bank for more than 2 years, it is imperative they are reviewing their rates and facilities. Funders are always reviewing their rates and offers and unfortunately, in most cases, the best deals are given to new customers to attract new business to the bank so the old customers often miss out. It is not uncommon for us to save people between 0.30-0.50% on their rate, which on a $500,000 mortgage can equate to $1,500 to $2,500 or a 10% increase to their cash flow per annum.”
Vecchio says it doesn’t always mean landlords need to refinance their loans. “In some cases, due to the relationships we have across all the major banks like Commonwealth Bank, Westpac and ANZ, we can renegotiate an investor’s existing home or investment loan with their existing bank without having to refinance. In some cases, the bank isn’t as interested in retaining the business due to a range of factors, and then we look at other options with external banks.” Since the government removed exit fees from the banks over 5 years ago, Vecchio says it is quite inexpensive to move banks, “we have several banks on our panel at present who are paying incentives of between $1250 to $1500 to move banks. We had a recent case where the bank was paying $1,250 per property refinanced to the bank so our client actually ended up making a $4,000 profit from moving multiple properties across to the new bank so it is definitely something worth investigating further.”
As you can see there are plenty of ways to increase the appeal of your property and turning it into a positively geared property without going too overboard with your budget. If you have any further questions please don’t hesitate in contacting on of the professional’s here at Red & Co.