Renovating A Rental Property: 4 Questions To Ask

close up of calculating the costs of renovation

17 Feb Renovating A Rental Property: 4 Questions To Ask

Renovating a rental property is about investing your money in the right upgrades so that you get the maximum return on your investment. It’s not the same as renovating your own home. Rather than imposing your own personal tastes, in a rental property renovation you need to consider practical changes that not only add value but are long-lasting and hard wearing. Before you begin your rental property renovation, here are 4 questions to ask yourself.

1. Is it worth the cost?

Before your begin any renovation, it’s important you calculate the potential return on your investment and decide whether or not the cost you’ll need to outlay is worth the potential increase in earnings.

That means calculating how much extra rent you could charge – or how much more you could sell for – once any upgrades or renovations have been completed, and then dividing that number into the renovation cost to get a percentage return on investment (ROI) and an estimate of the time it would take for your investment to pay for itself.

For example, if you plan to spend $7,000 on painting the inside of your rental property and fitting new carpets throughout, while potentially charging an additional $30 a week in rent, your ROI calculation would look like this:

Yearly rent increase = 52 weeks x $30 additional rent = $1,560

Divide that number by the cost of the renovation at $7,000 = 0.22 or 22.28 per cent return on investment.

Within 3 to 4 years, your investment will have paid for itself. What’s more, by financing your renovation or upgrade with home improvement loans, there’s no initial capital outlay so you don’t have to foot the bill up front.

2. Will it add value?

Certainly, renovations or upgrades to rental properties can help you achieve a higher return on your investment, as renovated properties tend to demand higher rental rates. However, that’s not the only good reason to renovate. Adding value and improving your rental property’s worth can have a number of other important benefits too:

Increase equity

Renovating or upgrading a rental property is an excellent way to add value and increase equity – the difference between its current value and the amount you owe your lender. To further grow your property portfolio, you may be able to access the equity and use it as a deposit to finance other property investments.

Tax benefits

As the owner of a rental property, when you complete significant renovations or repairs to your rental property, you can claim these costs as deductible expenses.

Less maintenance

Newer fittings and fixtures are less likely to break which means less time and money spent on repairing or replacing items in your rental property.

Lower vacancy rates

Most tenants choose to stay longer in rental properties that are well looked after, so you’re not losing money with an empty property.

Renovating is an expensive exercise so it’s a good idea to focus on the areas where you can add the most value for the lowest cost.  Whether you want to add value to your rental property to achieve a better rental yield or to resell it at a later stage for a profit, choosing the right materials and the right areas in your property to upgrade are vital.

As a general rule, items that can be fixed or repaired shouldn’t be replaced, and often a thorough clean or a fresh coat of paint can make the biggest difference. Most landlords agree that the two key areas in any rental property are the bathroom and kitchen, so consider upgrading these functional spaces first as they will likely have the biggest impact on your bottom line.

3. What are my legal obligations to the tenant?

As a landlord of a rental property, you have certain responsibilities to your tenant under the Residential Tenancies Act 1986, including:

  1. Ensuring that the property is in a reasonable condition – free from mould or damp
  2. Meeting all relevant building, health and safety standards
  3. Insulating the property and ensuring it complies with the healthy homes standard – warm, dry and ventilated
  4. Checking all locks work and the property is secure
  5. Installing working smoke alarms
  6. Maintaining the property and doing any necessary repairs
  7. Confirming whether the property is covered by landlord insurance as part of the tenancy agreement

 

When carrying out extensive renovations, repairs or upgrades to your rental property, landlords need to obtain agreement in writing from the tenant. Any renovation work must fit in around your tenant’s right to “quiet enjoyment” time.

You’ll also need to discuss with your tenant if they are to remain in the property during the renovation or move out on a temporary basis, outlining how long the renovations are expected to take; storage of your tenant’s belongings; alternative accommodation costs or a rent holiday / reduced rent payments; as well as who will be responsible for outgoings like water and electricity during the renovation period.

4. How will I pay for the work? 

When it comes to rental property renovations, money is often one of the biggest considerations. If you don’t have the savings available to pay for your project, options for financing your renovation can include applying for a home improvement loan or borrowing against the value of your property.

Using a home improvement loan

A home improvement loan could be a great way to finance renovation projects, especially if you haven’t had the opportunity to build up equity in your property yet, or only need to make minor updates or repairs to your property. A home improvement loan is a completely separate personal loan and generally comes in two forms, either a secured loan or an unsecured loan. Unlike a credit card, a personal loan usually has much lower interest rates and a set repayment plan, helping you save money on interest costs and enabling you to have better control of your financing and budgeting process.

Compared to the process of accessing home equity to fund renovations, personal loans usually offer a fast turnaround time – often a personal loan can be approved within 24 hours. As such, it can be a useful option to cover urgent upgrades and repairs that crop up unexpectedly.

Borrowing against the value of your property 

For major work, such as a significant addition to your rental property, or a knock down and rebuild, you could be looking at costs into the hundreds of thousands of dollars. Working on such a large-scale project, you may need to consider borrowing against the value of your property. In practice, this means tapping into the equity you’ve built up in your property and increasing your home loan size to help fund the renovation. How much you can borrow may be subject to the amount of equity built up in your property and other lending criteria. To get an idea of how much you may be able to borrow, you can consult a mortgage adviser like us. At Max Mortgages, we specialise in helping Kiwis arrange home loans NZ wide, and we can work with you to ensure a smooth and successful outcome.

One of great advantages of rolling your renovation costs into your home loan, of course, is that you will benefit from mortgage interest rates. It’s worth noting that interest rates that would be considered very competitive for a personal loan product could still be relatively high when compared against home loan interest rates. However, on the other hand, personal loans typically have shorter repayment timelines than home loans. If you are able to afford higher repayments, a personal loan may help you save money on the total interest you will pay over the life of your loan. Which financing option to go for really depends on your financial situation, your objectives and needs.

Find the right financing solution

Renovations don’t always go smoothly, but we’ll make sure your financing process does. If you are considering making some changes to your rental property but short on funds, give us a call on 0508 629 5626 and let us guide you to finding the right financing solution!

What’s more, once your renovations are done, our insurance specialist team at Max Insurances can help review your house insurance to ensure your cover is up to date. This means updating your sum insured if renovation changes the value of your property and adding additional coverage for your add-ons if necessary. Providing our customers with maximum service at minimum fuss is our motto, and we do this by supporting you in all areas of your renovation journey. Get in touch with us to find out more about what we can offer!

Contact a Mortgage Adviser

 

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