Direct property investment has never been a passive occupation. Unlike shares or bonds, investment properties can’t be placed in the bottom drawer and forgotten about.
Tenants must be found, served and replaced from time to time. Checking in regularly with the managing agent should be an ingrained discipline to maintain an even keel and avoid surprises. And, every few years, the property will require work.
With renovations, the timeless quandary for landlords is finding the right path. You will want to avoid over-capitalisation – wasteful spending without enough return to justify the outlay. But wise investors also know that under-capitalising can be just as costly.
Skimp on maintaining a property and you’ll struggle to find and/or keep a tenant or maintain the rental yield. The bar on what tenants expect has risen in recent years, mostly as a result of a surge in new apartments and townhouses with shiny mod cons and modern styling.
The boom in renovation and lifestyle shows is also a factor. Whether an owner of an older-style property should consider trying to out-bling the new developments depends on the extent of the threat.
The intensity of development varies from suburb to suburb. The form of the development also matters. Prospective tenants tend to split into distinct categories: those in the market for a house or those who want an apartment.
So if development in your area is skewed towards apartments and you own an older-style house, the threat is less acute than if you own an older-style apartment. On the other hand, if you do own an apartment, how costly is it to try to match this level of amenity, and is it worth trying?
A designer-level renovation is a big job. It often includes a new kitchen with prestige oven and cooktop; a new bathroom, including wall and floor tiling; new carpets and the polishing of floorboards; new fixtures, fittings and repainting.
If it’s a house, it might also include skylights, exterior painting and a deck out the back.
Be prepared to pay $50,000-plus – even more if you consider moving walls to create bigger rooms or open the house onto the garden. But it may be worthwhile. It’s not unusual for this sort of investment to support about a 40 per cent rise in rent and for every dollar spent on renovation to increase the value of the property by two dollars.
The key to success is focusing on renovations that are visible to tenants. Avoid significant unseen structural work, such as rewiring, fixing roofs and restumping.
Tenants aren’t willing to pay more for these types of improvements. Prospective investors should avoid properties that require this sort of work. Try to buy from someone who has already done the heavy lifting.
Notwithstanding the likelihood of a good return from a designer-level renovation, pause for thought before going this way – $50,000-plus is a big commitment and costs can balloon.
Success depends on the design vision and the skill of the tradespeople. On occasion, the outcome doesn’t deliver the expected financial uplift, either because of poor execution or misjudged decisions about taste. For instance, no matter how hard you try, some properties just don’t lend themselves to avant-garde styling.
Indeed, less is more is often the optimal route when it comes to renovating older properties. Although there are tenants who crave chrome, frosted glass and wood finishes, it isn’t to everyone’s taste.
Many tenants and homeowners prefer a property with a timeless or even retro feel, especially if it is going to cost them less to rent. For this audience, it’s about freshening up a property, not transforming it. So:
- Repaint, recarpet and polish the floorboards.
- Put up new blinds, fix or install flyscreens and update the light fittings.
- Replace the dirty oven, but forgo the prestige European brand. A new mid-priced stove and rangehood is fine.
- Keep the kitchen cabinetry, but consider new doors and handles.
- Attach deeper benchtops over the old ones to increase work surface area and consider adding a splashback.
- Regrout the bathroom tiles.
- Polish up the 1960s bath.
- Consider adding split-system airconditioning.
- Depending on the size of the property, a modest renovation can often be done for as little as $5000 and typically for between $10,000 and $20,000.
You tend not to achieve the same magnitude of uplift in rent level and property value as the designer-level renovation delivers. But with rents often jumping by 20 per cent or so, the percentage return on the outlay may well be superior. Less ambitious renovations are less likely to overrun, go wrong or be rejected by tenants as not worth the extra money.
Good property managers know what the pool of renters want, and they also use the best tradespeople. So if your property is tired, book a makeover meeting with your property manager.