Eight investment property renovation tips to maximise your rental income
Licensee of We Love Rentals, Brendan Leahy, offers his top eight tips to help owners of investment properties maximise earning potential through renovation.
Anyone who owns an investment property is currently in a booming industry. With people turning to rentals as a viable option for investing, owners can make a significant return on investment (ROI) if they manage things efficiently.
Of course, that means investors need to make good decisions with their properties, including purchasing the best properties and knowing when and how to renovate.
An astute property investor must determine if they should upgrade or renovate a property they are purchasing. In some instances, this is an ideal way to maximise rental income. As the licensee of We Love Rentals, property owners often ask for investment property renovation tips.
So, if you are a property investor considering renovations, here are eight tips to give your rental property a boost and generate better cash flow.
1. Assess the property’s condition
Before diving too deep into renovations, check the property out thoroughly from top to bottom. Not every rental is going to need the same amount of work. Some homes may not need renovating, while others may require more work.
Assess the extent of renovations that need to be done to bring in a greater rental return. Renovating an investment property doesn’t need to be complicated if you keep in mind that your upgrades can be equal to what is necessary.
2. Perform a rental rate analysis
It’s vital to ensure that any renovations will be cost-effective. One way to determine that is to perform a rental rate analysis. This consists of analysing the going rate for three similar properties in the same area. Then average the three rates to get a comparable amount.
Once the rental rate yields are determined, it will be clear whether renovations will be cost-effective. It may be necessary to renovate to bring in the amount of rent nearby rental properties are getting.
3. Weigh the pros and cons of an upgrade
The pros and cons of an upgrade can be weighed by determining how much will have to be put into the home versus how much can be made from it. For example, calculate the ROI by adding up the price of the property plus the renovation costs. Then figure out how much net income can be generated every month for rent. Don’t forget to subtract any utilities to be paid, taxes, insurance and rental management fees. It can now be determined if the upfront investment will yield a decent ROI.
4. Assess the tax deductions and depreciation benefits for rental property renovations
When determining whether to complete property renovations, don’t forget about the tax deductions to be gained from these purchases. Rental property tax deductions can sometimes offset the renovation enough to make the entire project worthwhile.
Keep in mind that items purchased for less than $300 can be claimed in full in the same tax year they were purchased. These are immediate deductions and can add up if you have several smaller purchases to make. For example, some items that might fit this renovating description include:
- fresh coat of paint
- ceiling fans
- door handles and locks
- light fittings
- cabinet hardware.
These are just a few examples of low-scale renovations that are individually less than $300 but will add up to a decent amount for a tax deduction.
Depreciation benefits are another reason to consider renovation. When deciding whether to renovate versus flip a house, note the gain from the tax benefit of extra depreciation allowances. It’s essential to keep a depreciation schedule to track all the assets, the year they were bought, and how they depreciate. Then be sure to claim depreciation items.
5. Make the best renovations
Sometimes high-scale renovations are the best way to go for a project. For example, a property that is in poor condition will require a major overhaul. In that case, make a capital improvement to the home and increase its value without paying capital gains tax.
A newly remodelled house will also bring in much more rental income, too. Doing a high-scale renovation may seem like a lot of cash up front, but it can bring the most value in the end.
Some of the renovations worth considering with this type of upgrade include:
- complete bathroom remodel
- kitchen renovation or new kitchen
- whole house paint job
- new flooring
- remodelling the second storey
- adding a new bathroom.
6. Consider the market being targeted when doing renovations
When determining what type of renovations an investment property needs, investors must consider the target market. This is something that might be overlooked. For example, if your market is young professionals, you would want to make property investment upgrades targeting their desires. Property management advisors can provide insight into the target market for a given community or area.
A property investment company will want to invest more into an area where the tenants are wealthy, as opposed to an area that is primarily middle class. They know the property value is higher, and they can obtain more in rental income.
7. Implement smart upgrades
It’s not always necessary to do high-scale renovations to make a smart renovation project. If you keep your target market in mind, you can tap into what they would want in a house and fulfil that desire. For example, when renting to younger generations, they often want “smart” upgrades, which means technology or “smart” home products. These types of products are not always as costly as expected. In fact, a few low-scale technology renovations can deliver a decent rental yield improvement.
For example, even putting in inexpensive security cameras is a good move. People like to feel secure in their homes.
8. Don’t get in over your head
When beginning renovations, remember not to get in over your head. Stick to a budget. If a renovation project is leading to too much debt, it may be time to reassess the situation.
The assistance of a property manager at a highly respected rental management company, can help in making the right choices with your next renovation project.