How much should you spend on investment property renovations?
There’s something about a fresh coat of paint, new carpet and contemporary blinds… but then there’s also something about a brand-new kitchen benchtop, a bathroom makeover, premium appliances and a landscaped backyard…
Home renovators can easily get carried away in renovation ‘la la land’, particularly if Pinterest has anything to do with it, but big dreams and broken budgets are bad news for investors. So, what should investors spend on property investment renovations and where do you draw the line?
The following questions will be helpful to consider when deciding what you should spend and how you should spend it.
What is the value of the property?
Before setting a budget for renovations, investors should consider the total value of the property. Experts vary in their advice, but most recommend homeowners spend between 5-10% of the total value of the property. For example, for a property worth $500,000 you could spend between $25,000 – $50,000 on renovations.
However, as an investor, you will likely want to spend as little as possible to increase profits. You should focus instead on the value of the renovations and how they will add to your rental income or increase your end selling price.
What is the purpose behind your investment property?
Is the property a long term investment or are you looking to ‘flip’ the property and sell for a profit in just a few years? The purpose behind your investment will help determine how much you should spend.
If it is a long-term investment and budgets permit, it may be wise to spend more on renovations initially, so you’re not required to make upgrades in the future. Piecemeal renovations can be more costly than engaging contractors for one larger job. It may also cost more if you have to move tenants in and out of the property. If you plan to hang on to the property, investing in a quality renovation will serve you well as you will be the one to bear the consequences of a cheap renovation or ‘patch job’ in years to come.
If you plan to keep the property for a short period, a cosmetic renovation may be the best option. Focus on cost-effective changes that can increase the weekly rent or appeal to buyers, such as fresh paint, new carpet and small upgrades in high traffic areas like the kitchen. Your renovation costs should not be more than what you can make back from the property in either rent or capital gain, whether you plan to keep it for 2 years or 20 years.
Who is your audience?
Who will rent or buy the property? Thinking about your audience will be helpful when deciding how you spend on renovations. For an inner-city apartment catering to young urban dwellers, the kitchen and quality of fixtures may not be so important. Conversely, it may be important to focus on renovating the kitchen in a property catering to families. In a high socioeconomic area where the property has a high value, the quality of fixtures may be important to draw in the right renters and buyers.
Can you recoup the costs?
This is a central question and requires careful research of the property market. Look to similar properties in the area, compare them and review their selling points. This will give you an idea of the features that you should focus on in order to attain a given rental income or selling price and not only recoup your costs but make a profit.
What should you renovate?
Make the distinction between what is necessary and what is liveable. For example, some structural renovations may be necessary if there is water damage, but an old kitchen that is functional, depending on the value of your property, purpose and audience, may be unnecessary to renovate.
If you’re planning to renovate, prioritise high traffic, highly visible areas such as the kitchen, living room and bathrooms. Unfortunately, kitchens and bathrooms come with the most expensive price tag. Experts recommend spending no more than 2% of the property’s value on a kitchen or bathroom renovation. However, kitchens and bathrooms come in all shapes and sizes, so costs will vary.
Bedrooms, study and laundry are lower priorities as they won’t add much to your rental income or final selling price. You should also focus on landscaping in the front yard over the backyard, as this will make an impression on potential renters and buyers. It may be helpful to work out the value each room brings to your property and allocate your budget accordingly.
Your budget will be the deciding factor when it comes to how much you spend on renovations as an investor. You can only spend what you have and when you go over budget you can eat into your profits, or worse come out at a loss.
To stretch your budget and potentially increase your profits you may like to consider what you can do yourself. Project managing your own renovations can save you thousands, but make sure you’ve allocated the time and know-how to do the job effectively.
When deciding how much to budget for renovations of an investment property the question will always be, what value does this renovation bring? Renovations on an investment property should be undertaken with the purpose of increasing profits – renovations that you cannot recoup the cost of should be forgotten.
At Mortgage House, we’re no strangers to the property investor’s journey. It’s a long (but rewarding) one. If you’re thinking of applying for a home loan, you can Apply Online today to get started!