When Should You Renovate Your Investment Property?
In a previous How To Session, Three Cheap Cosmetic Renovations You Can consider, I talked about getting the best bang for your buck when it comes to a cheap cosmetic renovation. In this How To Session I’m going to focus on, “When should I do a renovation on my investment property?”
Quite often, from people transitioning their renters, I get asked, “Is now a good time to actually do up the property?”
Now, the first thing I would normally ask is, “Have you spoken to your property manager?” because it’s an important conversation.
Why would you speak to your property manager? You need to understand the level of demand in your marketplace and whether your property is meeting that demand. So if there’s a really strong, pent-up demand, and your property is in a neat and tidy order — it may not necessarily be brand-new, let’s understand that — but if it’s in a neat and tidy order just get the new tenant in the door. You don’t want to face the biggest expense of a property investor.
What I often see is people comparing their own owner-occupier and how they want to live — their own mindset around it —and say, “Oh, I need to tidy it up. I couldn’t live here. Well, the reality is neat and tidy is all you need. This is a business. We want to make sure that the actual infrastructure — in other words, the fixtures and fittings inside the property — have still got a usable life. We want to use them for the maximum period of their usable life because, remember, it is a business.
If there is a period where the usable life or property is beyond tired, and is not necessarily neat and tidy — not just to your liking — then that’s when we have a conversation with the property manager again. We ask them, “What’s going to be best: a cosmetic renovation or a structural renovation?”
Because if we just do a cosmetic renovation, then this will be determined by what the rental market is telling us about how much they’ll pay, and we might get a little bit more out of them. This, versus a structural renovation where we could fundamentally change the property — say a two-bedroom house into a four-bedroom, two-bathroom house. Again, it’s all going to come down to the numbers. Because in reality, it’s no good taking on a large amount of debt to do the structural renovation if we’re not going to improve the overall percentage of the rental yield we’re getting now.
That’s quite technical, but it basically means: if it’s going to cost us more on an ongoing basis compared to the yield we were generating on the property when it was neat and tidy … why would we spend the money? Remember: renovation does not equal riches.
Continue to get the best maximum yield out of your property when it is in a neat and tidy state. Make sure you continue to do your regular maintenance; but neat and tidy is all you need. Down the track, in three or five years’ time from now, then you may be in a position to say, “Well, I will do one, either a cosmetic or a structural renovation, if I believe I can add value and I’m going to get a return on investment.”
Thanks for watching.