Improving and renovating your property adds value, but spend wisely if you want a good return.
Spending more than you bargained for is the catch-22 of renovation projects. Almost everyone who upgrades a property exceeds their budget, at least by a small amount.
This is partly because building works can lead to additional and unanticipated expenditure, particularly in the high-cost areas of plumbing and rewiring.
Home owners tend to see such cost blowouts as part and parcel of modern living, and find the extra money. But for investors, overspending on projects means they are eating into future rental or sale income and reducing profits.
Valuer and buyer’s advocate Greville Pabst, of WBP Property Group, says investors need to keep a firm lid on budgets and always work out beforehand how much extra rent will be generated by a renovation.
”The budget is important because people frequently underestimate the costs of renovation and that can impact on the investment performance,” Mr Pabst says.
Being able to attract a higher rent is merely one of the positive spinoffs of renovating an investment property. You also broaden the pool of tenants you attract and generate handy depreciation allowances when you install a new kitchen or update the curtains and lighting.
First-time investors often have the potential to write off depreciation against their taxable income but haven’t been given the necessary paperwork on depreciation allowances by the previous owner. In other cases, property developers provide incomplete depreciation reports to off-the-plan buyers.
Regardless of whether you are buying a new or established property, it’s worthwhile to have the outstanding depreciation checked by an independent quantity surveyor.
Renovating quickly is also critical. Property adviser Sam Saggers of Positive Real Estate says if you can’t complete a renovation within three months, it’s likely you will overcapitalise. ”I’m not a fan of massive renovations because they can often turn into a form of developing,” he says.
Mr Saggers says for every dollar you spend you should expect to gain three dollars back, so it’s imperative to know your costings in detail.
Don’t forget the building facade. Most tenants do a ”drive-by” inspection of a property and then decide whether or not to go inside. If a property is not attractive, a lot of prospective tenants simply keep driving, so think about adding new plants and doing some landscaping. Painting the front helps, too.
Advantage Property Consulting managing director Frank Valentic has bought a number of whole blocks of units in inner Melbourne in conjunction with other investors. When he buys into a whole 1960s or ’70s block, a top priority is to upgrade the facade.
”You can get really good results with the older blocks when you renovate the outside and the inside,” he says. ”When investors buy into an apartment block on their own, they find they can’t renovate the outside because you’ve got to get 75 per cent of the owners to agree.”
Mr Pabst says improvements should be tailored to the area’s demographics.
”If you are renovating in an area that has a lot of young families, then your renovation should try to reflect that,” he says. ”But if your rental property is in South Yarra, where there are many young professional couples, they will want things that young families don’t want.”
Budget reno tips:
Replace the front door and make sure the new door has a warm colour.
Do some basic landscaping in the garden.
Replace carpet with polished timber boards.
Paint all internal walls, and include a feature wall.
Resurface the kitchen cupboards and/or replace benchtops and handles.
Sam Saggers, Positive Real Estate