For this month’s blog we take a look at renovating your residential rental investment and what value and financial benefit that can bring you as an owner. Each example includes the cost of our project management fee as we managed each of the renovations of these assets.
We take three different properties in three different suburbs and understand: –
– what their previous rental amount was;
– what value was added and the cost of the renovation (including our project management fee);
– what the current rental rates are and;
– what the payback period is for investing in the renovation*.
Example 1 – Three bedroom home in the Altona area
Property was being leased at $1,434 before Tenants vacated and a renovation was completed. We managed the renovation that included installing a second hand near new kitchen, painting, lighting upgrade and tiling. Total investment towards repairs was $14,210 and the property was leased after one open at $1,695 per month. Annual rental improvement is $3,132 combined with $972 in tax savings in year one brings the total annual benefit to $4,104, the payback for this renovation is approximately 3.36 years*.
Example 2 – Two bedroom apartment in the South Yarra area
Property was originally vacant however a similar two bedroom apartment in the building was leased at $1,217 and was in better condition. We managed the renovation process which included new kitchen, painting and various other repairs. Total investment towards repairs was $11,405 and the property was then leased after one open at $1,477 per month. Annual rental improvement is $3,120 combined with $780 in tax savings in year one brings the total annual benefit to $3,900, making the payback period approximately 2.84 years*.
Example 3 – Three bedroom home in the Brunswick area
Property was being leased at $1,950 before Tenant vacated and we undertook a substantial renovation. We managed the renovation that included installing a new kitchen, painting, landscaping and new guttering. Total investment towards repairs was $19,800 and the property was leased after two opens at $2,390 per month. Annual rental improvement is $5,280 combined with $1,354 in tax savings in year one brings the total annual benefit to $7,931, making the payback period just under 3 years*.
*The payback period factors a modest $5 per week rent increase each year and the tax saving is calculated on you having one rental investment and being in the 38% tax bracket with an 18% reduction in tax savings each year, these figures are estimated and your individual tax situation may be different so please seek professional financial advice specific to you.
Our calculations do not factor the time saved in securing a new Tenant as new properties generally take a shorter time to lease, we have done this to roughly offset the time taken to renovate the property.
As you can see from the examples, it’s clear that by undertaking a renovation you will in a short time frame have your initial investment paid back whilst reaping the rewards of a significantly higher rental for the future. Not only do you get the higher rental to begin with, you typically gain a better quality Tenant and a lower amount of repairs being needed during the year.
Contact us should you be considering the need to renovate your investment and would like a chat on how we can help you make managing your investment much easier.