When you do it correctly! So the question is “How do you do it correctly?”
The answer is by
• knowing what you want financially
• working out a budget to help you achieve it
• looking closely at the return on investment (ROI) and
• making the hard decisions
Know why you want to renovate
First off, it is important to realise the reasons for refurbishing an investment property versus your own home are very different. An investment property is all about business, whereas your home is about enjoyment and financial gains are a bonus.
When considering upgrading an investment property the usual reasons are;
• Maintaining or increasing the property’s value
• Preventing future structural problems
• Reducing maintenance costs
• Attracting better tenants
• Increasing tenancy stays i.e. from 6 to 12 months
• Reducing vacancy periods
• Altering a property’s tenancy “type”, i.e. from residential tenancy to holiday letting
These reasons can then be broken down again. For instance, you may want to increase the property’s value. Is this because you want to sell the property in the immediate future or you believe you will attract a better tenant. The type and extent of refurbishment you undertake could alter, depending which it is.
Work out your budget
After you have identified the reasons for upgrading the premises, a budget must be decided upon. There are a couple of factors involved in determining your budget. The first is what you feel comfortable with. The second is what you can spend without overcapitalising the property.
Obviously we can’t help you determine the budget you feel comfortable with but we can give you a guideline on how to work out a budget that won’t overcapitalise your property. First you determine what your property is currently worth. Secondly you find out what the best property in the street/area is worth. (Presumably you will be comparing a house with a house or flats with flats. If not, attempting to compare the two will be extremely difficult for a lay person and you would be wise to consult your local real estate agent for assistance.)
Subtract one from the other and you have a starting point for your budget. For example, you bought a house last week at auction for $550,000. The best home in the street sold recently for $750,000 – a $200,000 difference. If you are going to live in the house capping your budget at $200,000 should prevent you from overcapitalising. However, if you are going to be selling you will need to reduce your budget in order to make the refurbishment financially worthwhile.
Look closely at the ROI
Lastly you need to look at your ROI. Question every change you intend to make, identify what the benefit will be and if it will equate to a financial return for you. If it doesn’t, is there another way to do what you want that will still achieve the desired effect and give you the return you’re looking for. Government subsidies should also be investigated as well as the new Eco Loan which is designed specifically for residential and strata corporations to fund any energy efficient project in a strata scheme. If an Eco Loan is applicable for you, the benefit is that wherever possible, repayments are matched to the energy savings. Often resulting in a break-even or positive cash flow for the strata scheme.
Make the hard decisions
After you’ve done all of the above there will be times when the amount of work, money or effort that has to go into part of, or the entire refurbishment will not be justified. You need to then start asking questions. “Is there another way to do this change?” “Should I keep this property or not?”. You’d be surprised at how many times you can find another way around a change or that it’s better for you to keep the property just as it is.
Refurbishments can put money in your pocket. But remember, the more ground work you put in, the more money you’re likely to put in your pocket.