Unlocking Value From Rental Property Renovations

Published 18 February 2021 by Team :Different

So, you’ve had your investment property for a while and are looking to increase your rental returns. One of the best ways to successfully raise the rent and unlock extra value is by renovating your rental investment property

By strategically renovating key parts of your investment property, you’ll be able to reduce maintenance costs, secure high-quality tenants and earn a higher rental return.

But, it’s important to understand what real estate renovations add the most value to ensure you don’t waste your time and money on fluff that doesn't add to the bottom line!

To maximise your returns, it’s essential to have a clear plan for your real estate renovations to ensure the process is smooth and efficient. Plus, taking some inspiration from how other Australian investors are renovating their rental properties will help you stand out from the crowd.

By following our investment property renovation tips, you can add significant value to your rental (which means extra cash in your back pocket).

How real estate renovations can help you maximise the value of your investment property

A whopping $36.261 billion was spent on home renovations in 2019, and there's a good reason why!

Whether you’ve just scored the keys to a rental that needs a bit of TLC or have a long-standing investment property in need of a fresh coat of paint, renovating can be a practical way to unlock extra value as an investor.

If you're smart about your rental renovations, you can unlock some serious gains from your property. The benefits of renovating your rental include:

  1. Secure long-term, high-quality tenants
  2. Reduce maintenance and repair costs
  3. Improve your property's rental return
  4. Increase the value of your property

A kitchen overhaul that costs you as little as $10,000 can increase the value of your property by as much as $50,000 to $60,000!

Let's dig into all 4 points.

1. Secure long-term, high-quality tenants

As an investor, you want to do everything you can to lower the chance of vacancy. Every week you go without a tenant is a week of lost income. Plus, you’ll be paying out of your own pocket for any expenses that crop up during that time, too. 

One of the top ways to find reliable tenants is by offering a desirable, newly renovated property. The best tenants will be on the hunt for clean, modern properties that have been attentively maintained by their owners. 

With a newly renovated property, you stand the best chance of securing these high-quality tenants (who will likely be happy to remain in your investment property for the long-term).

This is particularly true in competitive markets. If your property is similar in size and layout to other rentals in your area, investing in an apartment renovation will increase demand and put your property at the top of potential tenants lists. 

2. Reduce maintenance and repair costs

Smart investors are always looking for ways to reduce the amount they spend on expenses, repairs and property maintenance.

In many cases, completing proactive renovations can be a strategic way to improve the quality of your investment property and reduce the potential for major problems and costly repairs down the line. 

By focusing on high-traffic areas and investing in bathroom renovations and kitchen renovations, you’ll be able to nip potential issues in the bud (such as leaky taps, cracked tiles and poor ventilation) and lower the costs of maintenance and repairs over the life of your investment.

3. Improve your property's rental return

Setting the rent is all about supply and demand. While you can’t change market conditions, you can improve your property’s position in the market. Even older properties can be transformed into new and highly desirable rentals with a strategic renovation. 

In a sea of similar properties, the rentals that stand-out are those that are tastefully designed, well-maintained and freshly renovated. By completing a home or apartment renovation, you’ll be able to charge a premium for rent and increase your rental yield.

4. Increase the value of your property

The most obvious appeal of renovating your rental is that it makes your property's value grow.

When it comes time to sell, the money you put into your renovation comes directly back to you. Who doesn't love seeing the words "brand new kitchen" on a property listing?

Speaking of kitchens, did you know a kitchen overhaul that costs you as little as $10,000 can increase the value of your property by as much as $50,000 to $60,000? That's just how good the gains are.

The thing is though, that some renovations add more value than others. So you want to be strategic about where you start renovating.

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What renovations add the most value to a rental property?

As a general rule, focusing on a kitchen renovation and bathroom renovation is most likely to unlock value in your investment property. That’s because these rooms tend to date quickly as interior styles evolve and often show signs of wear and tear sooner.

To help stick to a clear property maintenance budget, it’s worth cherry picking a few key elements to update and renovate. Here are four key areas to consider investing in when completing a house or apartment renovation.

1. Replace tired flooring

Switching stained carpets and scratched floorboards for low-maintenance flooring is a simple yet effective way to boost your returns through renovating. New flooring instantly elevates the appeal of your property and leaves a positive first impression with potential tenants. 

And in many cases, you can purchase new heavy duty flooring options at a relatively low cost.

Here are some options to consider for the floor in each room in your investment property:

  • Opt for durable carpet in the bedrooms (such as solution dyed nylon carpet) which gives an element of warmth and comfort, while still being easy to clean.
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  • Lay simple neutral tiles in wet areas of the property, such as the bathrooms, kitchens and laundries that are heavy duty and easy to keep clean. 
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  • Invest in luxury vinyl flooring in high-traffic areas such as dining rooms, living rooms and hallways that are low maintenance, budget-friendly and won’t fade over time. 

2. Update fixtures in the bathroom and kitchen

While a standard bathroom renovation can cost upwards of $15,000 in Australia, there are simple ways to refresh this room without investing thousands of dollars. 

Purchasing new fixtures (such as tapware, handles and cupboard doors) are easy ways to update your bathroom and kitchen on a budget.

These items can easily be purchased at your local homeware’s store and can often be installed without a tradesperson to keep costs down.

To put this into perspective, it costs anywhere from $30 to $170 for a new set of taps at Bunnings, which can be installed for $150. 

These simple swaps will immediately breathe new life into your investment property and give the illusion of a full bathroom renovation or kitchen renovation (minus the $15k price tag).

3. Add extra space through building a granny flat 

If you have the space to do so, building a granny flat can be a smart way to boost the earning potential of your investment property. You could consider charging a premium for this extra space or even welcome a new tenant into the space, thereby generating a second stream of rental income. 

Broadly speaking, building a self-contained studio on an existing property can cost anywhere from $70,000 to $200,000 to build (depending on where you live and what kind of building you have in mind). 

While granny flats can boost your investment property’s earning potential, you’ll need to be prepared for the upfront cost of this major renovation.

It’s also important to do your research as each state and territory has different regulations about if you can or can’t build a granny flat on an existing property.

Plus, specific rules apply to who you can lease this space out to as well, so check with your local council to see what rules might apply in your situation.

4. Improve your investment property’s privacy and security 

Potential tenants are looking for rental properties they’ll feel safe and secure in. Luckily, there are simple ways you can improve your property’s privacy and security through strategic renovations. 

By repairing broken locks, improving outdoor lighting and adding secure gates and fencing, you can increase the appeal of your property to secure a tenant sooner and ensure stable, consistent rental returns. Plus, adding screening hedges and lush plants will improve the privacy of your property to increase demand for your rental property.  

To put this into numbers, here’s how much some of these simple improvements could costs:

  • A new door lock can cost between $70 and $350 dollars, and can be installed by Bunnings for $179. 
  • New outdoor lights can cost between $15 and $200 each, and can be installed by Bunnings for $189. 

A fence extension to boost privacy typically costs from $50 to $100 per piece, and can be installed by Bunnings for $99.

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How to plan a renovation project for your investment property

Now, you’re probably thinking: how do I actually go about renovating my property?

While these investment property renovation tips are helpful in theory, the challenge is turning these ideas into a successful reality. 

The secret to increasing your returns on your existing property through renovations is to thoroughly plan in advance, engage the right professionals and get clear on your priorities to ensure you’re making a wise investment.

1. Create a list of renovation priorities 

As an investor, you want to get the best return on your investment when renovating your rental property. The best way to do this is to figure out which rooms or elements of a renovation will move the needle for your rental income, and put those at the top of your list. 

While luxury benchtops and top-of-the-range appliances might seem like easy ways to boost your rental returns, you can often source more cost-effective alternatives that will make the same impression on potential tenants. Similarly, it might be smarter to simply update your tapware rather than investing in an expensive bathroom renovation. 

Plus, creating a list of renovation priorities will also force you to crunch the numbers and estimate how much each part of the renovation will cost. With these figures in mind, you’ll be able to select what jobs you can afford to ensure you stick to a reasonable budget.

2. Be careful of renovation depreciation

While you can claim depreciation when renovating your investment property (and potentially lower your tax bill), it’s important to not fall into the trap of getting rid of old assets too quickly. 

Here’s why: by throwing out old carpets, blinds, curtains, white-goods and light fittings, you’re missing out on potential tax deductions.

Instead, you should take the time to see if these items can be valued and claimed as deductions in your first year of ownership. 

Plus, it’s also worth engaging a quantity surveyor to create a depreciation schedule, which assesses the value of the property and its assets before renovating (and helps back up any tax deductions you make to the ATO in the future). 

3. Give your tenants notice

If you currently have tenants in your rental, you’ll need to give them written notice of the real estate renovations you’re proposing to complete. 

If your tenants have signed a fixed term agreement, you’ll need to give a minimum notice period to your tenants in writing (this varies between state and territories, so check what rules apply in your area).

In NSW, that minimum notice you can give is at least 30 days. Read the government's guidelines to notice periods so you know your rights and wrongs in your area.

4. Secure approval from the owner’s corporation 

If you’re planning an apartment renovation that is part of a strata, you may need to secure approval from the owner’s corporation prior to renovating

As a general rule, the level of approval you need depends on the type of renovation you’re planning to complete.

  • Cosmetic work (such as replacing hooks, installing handrails, or painting interior walls) can be done without approval.
  • Minor renovations (such as kitchen renovations, installing hard floors, and changing internal walls) will need owner approval with over 50% of votes in favour before completing these renovations.

Major renovations (such as structural changes, waterproofing, or changes to the outside appearance of the property) need a special resolution vote. In this case, you’ll need to give at least 14 days written notice prior to starting renovations.

5. Ensure you have qualified and certified tradespeople

At a minimum, your tradesperson should have a current builders’ license to ensure they are legally allowed to carry out your renovations. This is necessary for any renovations that are expected to cost over $5,000, along with jobs such as:

  • Electrical wiring
  • Plumbing 
  • Air conditioning
  • Refrigeration
  • Drainage 
  • Gasfitting

Plus, be sure to check your tradesperson has the right level of insurance to cover the specific tasks you’re booking them to complete. While a good builder should have construction insurance, it’s important to ensure they are covered to work on all aspects of your renovation. 

By doing your due diligence and checking these qualifications and insurance documents early in the process, you’ll save yourself the hassle and expense of choosing an unqualified tradesperson.

Can you claim renovations to your rental property tax returns?

Unfortunately, you can’t claim any renovation work to your investment property as a tax deduction. That’s because these expenses will be added to the base cost of your property to reduce capital gains tax when you sell. 

The only claims you can make are for genuine repairs needed while tenants are living in your property.

Think about the big picture for your next renovation project

Renovating your investment property can be a smart way to increase your rental yield and secure stable rental returns. But, it’s important to only invest in renovations that will increase the value of your investment property. 

By planning your renovation in advance, you’ll be able to find the most cost-effective options, prioritise which tasks will make the biggest impact on your bottom line and stick to an affordable budget when renovating your investment property.

Make sure you read our article on budgeting tips for property maintenance to learn more about winning at budgeting during repairs and renovations.

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Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you.

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