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Room for improvement: could renovating your rental property improve its performance?

Sunday, 8th Sep 2019

With Perth’s rental market showing signs of improvement, it’s a great time to review your rental strategy to ensure your property is well-positioned to take advantage of future market movements.

We’ve previously addressed the different strategies investors can consider to maximise their rental yields in these transitioning markets, but in this article we want to focus on one strategy in particular – property improvements.

It can seem counter-intuitive when coming out of a softer market to invest funds into improving your property before you see a big difference in your portfolio’s performance. In some cases, however, it could be the very need for improvement that holds your property back from performing at its best in the first place.

In the case studies below, we look at two recent examples from our property management team of how our recommended improvements have helped our clients enhance their property’s performance.

Case study 1

An owner of a property in Carlisle approached Momentum Wealth to re-lease their property after unsuccessfully attempting to sell the asset, which had been achieving $250 in rent per week with their previous property manager.

Being a young family and now facing a limited budget due to the funds they had invested in staging costs and the marketing for the sale, the owner was looking to achieve the best rental result possible with minimum capital outlay, generating a higher rental income until they were ready to review the asset’s performance in stronger selling conditions.

After fully appraising the property, our property management team identified a number of minor maintenance issues that required addressing, along with several potential value-add enhancements to help lift the property’s rental appeal.

Following discussion with the owner, the investor agreed to repaint areas of the property and improve its kerb appeal through minor amendments to the property’s exterior.

With the improvements in place, the property was readvertised for rent at $295 per week. The property immediately generated high interest, resulting in three applications from tenants at full price for a 12-month lease.

With a strong tenancy secured, the extra income from this uplift in rent will now generate an additional $2340 per annum –  more than double the amount spent on the improvements.

Case study 2

An owner of a 3 x 1 established house in Wilson approached Momentum wealth to lease their investment property, which had formerly been rented out to the investor’s family member.

The property had previously undergone an upgrade to the kitchen and bathroom, but was starting to become subject to general wear and tear from its various tenancies. In its existing condition, our leasing team appraised the property at approximately $300 per week.

Through the appraisal, our team also noted several improvements that would enable the owner to better take advantage of the property’s location and multiple living areas (something which is relatively rare for a 3 bedroom, 1 bathroom home).

Following recommendations from our property management and leasing team, the owner agreed to a number of improvements, including repainting the walls of the property, updating curtains and light fixtures and replacing the flooring in the rear games room.

With the improvements made and a number of general maintenance issues now addressed, our team re-appraised the property, resulting in an increased appraisal to $350 per week.

The property was advertised for rent in early August, with ten groups attending in the first two home opens and a total of three applications received. This resulted in an application being accepted above asking price at $400 per week, which marks an increase of $2600 per annum in rental income.

What you need to know before upgrading

In the right circumstances, performing upgrades to your rental property can be a great way to improve its immediate rentability, maximise its longer-term appeal, and reduce its vulnerability to long-term vacancy periods. However, whilst they can be effective when executed well, there are a few things you will need to consider before jumping into any improvements.

Understanding your target market is crucial

To avoid making changes that won’t pay you back in higher rental returns, it’s critical that you understand who you are appealing to when carrying out any upgrades to your rental property. It’s this demand from tenants that drives rental growth, so you want to ensure you’re making the right additions to capture this, keeping in mind that what appeals to you isn’t necessarily what would appeal to your target demographic. Your property manager should be able to advise you on required changes and value-add recommendations based on demand in the local market to ensure you’re not spending money in areas that won’t support your property’s immediate and long-term performance.

Prioritise your budget wisely

If you’re working with a limited budget, you want to be able to distinguish between the changes that will have the largest impact on your property’s performance and the “nice-to-have” items that you can leave for further down the line. To avoid overcapitalising, consider which aspects of your property need addressing or replacing immediately, and which items can be retained or even worked around at a lesser cost. For instance, replacing kitchen storage may require significant capital outlay, but a good compromise could be replacing worn out fixtures to refresh the property’s cosmetic appeal. This is where a thorough understanding of your target market will help you to identify which changes carry most value so you can prioritise accordingly.

Make contingency plans

Managing cash flow well during renovations is a critical step in ensuring you’re not overcapitalising on changes or putting yourself under too much financial stress. Depending on the extent of the changes, you may need to factor in any potential rental losses you will be incurring while the renovations take place. These should be more than paid for by the improvement in your property’s long-term performance, but you will likely need to a set aside a cash buffer to cover your costs in the short term. For more information about the importance of cash buffers, check out our article on the topic.

The right improvements to your rental property can be very effective to your overall portfolio strategy. However, it’s critical that you take an informed approach when looking to make changes to improve your property’s long-term performance. At Momentum Wealth, our leasing and property management team work closely with our clients to proactively identify ways to support and enhance their portfolio’s performance, looking beyond day-to-day management at their broader rental strategy. If you would like to discuss strategies to better position your property for success in today’s market, organise an obligation-free consultation with our team via the Momentum Wealth website.