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If, when and how to renovate your investment property

Interest rates, uncertain market dynamics and the initial specter of rental caps have seen many investors left pondering the future viability of their property investments in recent months.

Some of the questions we’ve been fielding include whether to retain or sell a property. If the decision is to sell, what renovations are worthwhile? Likewise, if they continue to hold it, what works need to be carried out for rentals and longer term capital growth?

Let’s look at considerations that should be taken into account when deciding if, when and how to renovate your property, from both a sales and rental perspective.

Affordability of renovating 

One of the major considerations for property owners contemplating renovations is affordability. Over the past few years, construction costs have seen a significant increase, driven by rising material and labour expenses. It’s imperative for property owners to assess their financial capacity to undertake improvements without jeopardising their financial stability, especially amid increased interest rates.

Carrying out renovations to a high standard 

Renovations demand precision and quality execution. Rushing or compromising on the quality of work can result in costly repairs and modifications down the track. While excessive spending isn’t advised, it’s paramount to ensure that renovations are undertaken with due diligence, serving the property’s long-term goals and catering to the needs of renters and prospective buyers alike.

Defining the purpose of renovation

Property owners should ask themselves whether they aim to enhance the property’s value for an eventual sale or if the goal is to improve its rental appeal. These distinct objectives require differing approaches. For properties intended for sale, the focus should be on enhancing presentation elements like floor coverings, window furnishings, lighting, and plumbing fixtures, which deliver the best immediate return on investment. It’s also important to understand the market you’re selling to. Is it likely to be another investor, or a first or second homeowner? The latter two will have greater expectations surrounding fit-out and quality of property.

When it comes to rentals, if you plan on holding onto your property for an extended period and are aiming for a better rental return, substantial upgrades like a new kitchen or bathroom might be worth the investment. While these may incur greater initial expenses, they promise lasting benefits, not just for initial renters, but for all future occupants. Additionally, it’s important to ensure your property aligns with current government rental standards, which have become significantly more stringent in recent years.

Meeting market expectations

A nuanced understanding of market preferences is essential when determining which renovations to undertake. In today’s high-demand, builder-constrained environment, buyers tend to favor turn-key properties. With the major works completed, buyers can then can focus on making their stamp on the property through furnishings and decor. This shift means that in today’s market properties geared toward sale should be move-in ready to attract eager buyers. Conversely, in competitive rental markets like apartments, properties must meet modern standards, often involving updates to kitchens, bathrooms, and common areas to attract and retain renters.

Risks associated with renovations

Renovation projects come with inherent risks, chief among them being the potential for budget blowouts. Prudent budgeting and a clear return-on-investment rationale are vital to justify renovation costs. 

Timing can pose challenges too, as securing a builder in the current climate can lead to prolonged vacancies. Preparing and obtaining quotes before your property becomes vacant is key to ensuring a timely renovation process. This way, you can swiftly list it for sale or rental once the upgrades are completed.

Financing considerations are also important. With current interest rate pressures, available equity may not be as substantial as expected. This might necessitate seeking funds from alternative sources or even taking on additional borrowing. It’s vital to ensure that your financial plan is feasible, considering the possibility of interest rate hikes.

Take home message 

The decision to renovate a property should take into account affordability, quality, purpose, market expectations, and potential risks. The current property market, characterised by high demand and limited builder availability, favours well-executed renovations. Having said that, there will come a time when buyers embrace DIY projects once again, so it’s worth watching for any changes in the trend.

From a rental perspective, given the market is extremely tight at the moment, owners may be able to get away with not optimising a property and still attract renters. However, the rental market will eventually swing, so if you’re planning on holding on to the property for the long term, moving ahead with improvements now will position you and your investment well into the future.

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