Tips for a successful property renovation
Property renovations are a common strategy used by property investors to increase rental returns and boost capital growth. However, whilst they can be incredibly effective when planned and executed well, renovations also carry inherent risks, and shouldn’t be looked at as a sure-fire solution to increasing a property’s value. We see too many investors falling into the trap of overcapitalising on updates that simply won’t pay off in the long run, or making the wrong renovations that don’t hold appeal amongst their target demographic. If you are thinking about renovating your investment property, here are a few tips to help you avoid these pitfalls and maximise the success of your strategy.
Get to grips with your target market
The key to making profit from a renovation is knowing what’s in demand amongst renters or buyers. Before committing to any changes, make sure you have a thorough understanding of your target market and their motivations, as this will help you determine which renovations are worth implementing. If your property is situated in a family-friendly area, for example, your target market might benefit from open living spaces, a greater number of bedrooms and outside areas. However, this is less likely to be the case in a suburb that attracts young couples who prioritise low maintenance properties.
Equally, you also need to be aware of your suburb’s maximum price point. In some cases, and particularly in “affordable” suburbs targeted to first-home buyers or price-conscious investors, there will be a limit to what buyers are willing to pay before they consider moving to higher-rated suburbs for the same price. This can be the case in suburbs such as Rockingham and Gosnells, which attract a large demographic of first-home buyers. Whilst properties in these suburbs might benefit from a cosmetic upgrade, major extensions in areas with an average price of $350,000 or less probably aren’t warranted, as the renovations will be unlikely to add the capital value required to generate a profit. By researching the local area and understanding the demands of your target market, you are more likely to see positive results in the form of increased rental yields and higher property valuation. Speaking to your property manager or a buyer’s agent is a great way to find out what is selling or renting well in the area. Remember – what you deem attractive in a property may not be the case for your target demographic, so getting this objective standpoint could save you from making unnecessary additions that won’t pay you back in profit.
In order to profit from a renovation, it’s vital that the funds invested are returned with adequate profit to pay for the time and interest costs associated with the project. However, you would be surprised by the number of investors who fail to budget realistically for renovation works and end up overcapitalising on upgrades they simply can’t afford (and which won’t add long-term value). Depending on the nature of the project, renovations can range in price from the low $1000s to upwards of $100,000 for large-scale makeovers. As an investor, it’s really important that you remain realistic about the actual works required and the costs involved. If you are working with a limited budget, consider which aspects of your property actually need replacing, and which features or fixtures you can retain and work around. In some cases, for example, you may be able to keep kitchen storage, but update worn out fixtures to give your property a cosmetic makeover. Again, this is where it’s vital to understand what drives demand in the surrounding area, as this will help you prioritise the essential jobs from the “nice-to-have” additions which carry less value. When it comes to budgeting, make sure you also take into account the rental losses you will be incurring during the renovation period. Whilst these should be paid back in the long run, you may need to set a-side a cash buffer to cover your costs in the short-term.
Don’t overlook kerb appeal
When renovating an investment property, most owners will focus heavily on the asset’s interiors, often to the detriment of the property’s exterior presentation. In doing so, however, investors overlook a key factor that can influence property price – street appeal. As in many walks of life, first impressions really do count when it comes to property. Whilst a well-presented exterior can be instrumental in getting more tenants through the door during home opens, it’s also a surprisingly influential factor in driving property price, and something that savvy investors will always take into consideration before purchasing an asset. In many cases, these renovations won’t need to break the bank; minor cosmetic changes such as a freshly manicured garden and a fresh lick of paint can go a long way in boosting your property’s appeal for a comparatively low cost.
Keep a record of renovations
Undertaking a successful property renovation is all about maximising profit, and an easy way investors can do this is by understanding and leveraging their tax entitlements. If you are renovating a property and retaining it as a rental, you will be able to claim depreciation on the new plant and equipment you install. Whilst this cost isn’t immediately deductible, it can be deducted over a period of years to significantly maximise the long-term profit you make from a renovation. During the renovation process, make sure you keep a record of the renovations you have made and organise for a quantity surveyor to draw up a tax depreciation schedule once the works are completed so you are able to claim the related tax savings.
Seek professional advice
If you are considering property renovation as a strategy to increase the value of your investment asset, seeking the advice of a property professional before implementing any changes could save you from making costly mistakes that won’t reward you through long-term profit. Professional property managers and buyer’s agents with an in-depth understanding of the Perth property market will be able to give you key insights into the local demographics, helping you to identify the renovations that will (and in some cases, won’t) add long-term value to your property.
Momentum Wealth is a research-driven property investment consultancy dedicated to helping investors accelerate their wealth through property. If you are looking to expand or maximise the success of your property portfolio, our property specialists will be happy to discuss your investment strategy in an obligation-free consultation.