Is it worth renovating your investment property?
Tenants moving out?
Trying to decide whether to renovate your property before the next tenants move in?
The key to answering this question is to look at the return you will receive.
The easiest way to do it, is to estimate the rent increase per year after improvements are complete, and divide that into the cost of the renovation.
Eg. You renovate your kitchen between tenancies and spend $7k. As a result, you are able to obtain a higher rent. Let’s say, $20 per week. To work out your return, calculate the rent increase over a whole year ($20 x 52 weeks = $1,040). Now divide that into the cost of the renovation ($7k) and you get 0.149. You can look at this as a percentage (or just multiply by 100) = 14.9%.
Please note: You should add items like a heatpump and as much insulation as you can without expecting an increase in rent. Every tenant deserves a warm, dry home.
How much more rent could you earn if you upgraded your kitchen & bathroom? Let’s say you invested $15k but could achieve $50 more per week in rent. That’s $2,600 per year, which is a 17% return on your original $15k.
Let’s say you could add a garage for $30k, but could charge an extra $50 per week in rent as a result. That’s an extra $2,600 per year, or an 8.7% return on your initial investment.
Not only that, you are adding value to your property at the same time.
Key points to be aware of:
The initial value of your investment is held in the property. You can’t easily take the money out again if you need it like you could with a term deposit. get the $30k back out once you spend it on the house but you can refinance!).
Also important to note that the value of the renovation drops over time. Eg. if you add a new kitchen, you’ll need to add another one in 20 years. Improvements like a garage may provide a lower return but will last a lot longer.
And finally... Always speak to your accountant for advice for making any major financial decisions to do with your property investment.