Capital costs v maintenance costs on your investment property
24
Mar

Capital costs v maintenance costs on your investment property

Fixing a dripping tap is one thing, renovating the whole bathroom is another thing altogether - but is it sometimes better to invest in an upgrade rather than repair? This is a common question many investors face at some point when growing their property portfolio, especially if they own an older property. 

What may initially appear to be a small issue in an older property can become Pandora’s Box when you discover, for example, the dripping tap has caused water damage and rot in the bathroom. Consider the source of the problem, as well as the extent of damage when doing a repair to ensure you have the whole picture. This way you can ensure you are genuinely resolving the issue, rather than applying a band aid. Sometimes a “quick repair” can be false economy if you have to do it again in a few weeks’ time.

If your kitchen, bathroom or other area of the house has reached a “certain age” and is costing you money in regular repairs, the cost-effective option could be replacing it. Aside from the saving in repairs, upgrading has other advantages too.  

Target market

Tenants have different reasons for renting a property. For many, it may be because they haven’t yet acquired enough capital to secure a home loan. Others may not have found the right property to buy, or are not ready to commit to a mortgage or living in a certain area. A common misconception many investors have is assuming tenants are seeking the cheapest rental rate possible and will settle for an older, run-down property in exchange for a reduced rental rate. Whilst this might apply in some cases, many tenants like to live in a clean, modern space they would be proud to entertain friends and family in. Many tenants enjoy cooking and appreciate well-appointed kitchens with quality appliances, ample bench and storage space, or an alfresco dining space.

The key for investors is to carefully consider who they want their property to appeal to. Your target market is often determined by the location and size of your property, but can be influenced by the condition of your property, as well as creature comforts such as appliances. For example, a high-quality kitchen, bathrooms and entertaining space would appeal to a working professional couple. A young family would appreciate an open-plan style living space so they can keep an eye on children, as well as a low-maintenance outdoor space where young children can play safely. 

Often, properties in better condition attract higher-quality tenants. This is not always the case, but generally clean, well-appointed properties attract tenants who will look after them.

Prioritise

Once you have identified the target market for your property, the next step is deciding which areas of your property need improving, and how much this will cost. Spending thousands renovating the entire property can be false economy if you are not able to get the rental return, so consider:

  • What are the areas of the property requiring the most work?

  • What are the top 3-5 things your ideal tenant would be looking for in a property?

  • Would a professional clean improve some areas of the property, i.e. deep grout cleaning in the bathroom or on floor tiles?

  • Are there any quick-win improvements, such as repainting or reflooring to be undertaken?

  • If the kitchens and bathrooms of the property look tired, consider what cosmetic improvements can be done to reinvigorate these areas without completely replacing them. For example, replacing kitchen cabinets, benchtops and appliances, or using a ceramic paint to respray tiles in the bathroom.

Keeping on track

Once you have determined your plan of attack and budget for improving your property, there are some additional things to consider to keep your schedule and budget on track:

1. Notify your building/neighbours of any forthcoming works

If you are about to undertake extensive/structural works, ensure you have the appropriate permissions in place. If your property is in a building or complex, you will need to have approval from the managing body. It is also considerate to advise neighbours of your plans to keep them on-side.

2. Don’t renovate your rental property like you would renovate your own home

Whilst it is tempting to pick the colours and finishes you like, this is not always the best choice for a rental property. As many TV design programs advocate, stick to neutral tones as they don’t date too quickly. This allows your tenants to add their personality to a property with furnishings and accessories.

It is also important to select serviceable finishes which stand the test of time (and different tenants). Don’t select a porous marble benchtop that will absorb every stain known-to-man, for example. There are ample choices of laminate and composite stone benches, which are durable and cost effective.

3.    Choose your trade specialists wisely

The tradespeople you engage in a renovation can make or break the end result - and your budget! Don’t select them based on price alone. Seek recommendations, your property manager is an excellent resource as they have access to quality trades. Brief your tradespeople thoroughly so they can quote accurately. It is important to ensure your tradespeople are fully insured. 

4. Stick to the plan

The old adage “failing to plan is planning to fail” rings true with any renovation. Organising your critical path of what needs to happen when is project management at its finest. Communication with your tradespeople is essential to work out the order in which things need to happen for everything to run smoothly. For example, should you paint or carpet first? The jury is still out on this one, by the way, but it will depend on your property, the type of flooring, and the way your painter and flooring installer prefer to work, so have this conversation early in the planning stage.

The other component of the plan is your budget. Set one and stick to it, but also add in some contingency for things out of your control, such as weather events, supply shortages and price changes.  

5. Don’t over-capitalise

Over-capitalising is one of the biggest mistakes investors make when renovating their investment properties. Over-capitalising is when the cost of your renovations cost more than the value they will add to your property. Even if you aren’t planning on selling your property right now, the cost of expensive renovations could take years to recoup, if you ever do. To avoid this, know the value of your property, as well as other properties in your area before commencing renovations.

Be strategic by understanding what your tenant wants (as well as what they don’t want) and focusing on improving these areas. Don’t limit your market by being too specific with colours or fixtures – less is more, and neutral is better. Think outside the box and consider other value-add services for your property, such as making your property greener by installing solar panels. These additional perks will help your tenant reduce their bills and add a unique selling point to your property. Working smarter, not harder on upgrading your rental property will attract the best tenants - and leave more money in your pocket.

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