Having long term tenants is a bonus for a landlord, but it also gives rise to a number of issues when they move on. It is really hard to do any major type of update or renovation like painting, changing carpets or revitalising the kitchen when the house is occupied. When they do move out, the required renovations may not be small or inexpensive to undertake. So where should you focus your efforts and expenditure? And how should you fund it?

The first advice you hear is usually to speak to your real estate agent. While you should do this and respect their views, you have to remind yourself that their interests are focused on finding the next tenant. An investment property is more like a business in that you are trying to maximise the return on your investment. You don’t live in it, but the property does need to be neat and tidy and the fixtures and fittings must meet their intended purpose safely.
The one valuable insight that your agent can offer is a better understanding of your target market - what they would expect and how much they might be prepared to pay for any extras. A good rule of thumb is that if the tenant isn’t prepared to pay any extra rent for it; then don’t do it.

The decision may be whether to make a cosmetic change to the property, like paint and carpet; or to make a structural change like adding a bathroom or bedroom. The financial challenge is whether you will be able to recoup the cost through an increase rental yield.

As an aside, for an existing tenant, you need to consider whether any rent increases are likely to be considered excessive, in the ACT for example; landlords need to justify to the ACT Civil & Administrative Tribunal are pretty much restricted to rent increases under CPI + 20% (which is currently about 2.04%) unless they can argue justification.

The renovations that are commonly felt to add value to your rental property are

  • A new or majorly improved kitchen
  • A new or additional bathroom

Some of the most common cosmetic updates include

  • Wash the walls and repaint them.
  • Give the garden a bit of a makeover (usually this means giving it a good tidy up).
  • Put up new curtains and/or blinds.
  • Improve storage with wardrobes (built-in are preferred if possible).
  • Install new door handles (but make sure that the doors close properly first and that all the hinges are in good working order).
  • Change to high watt, low energy lightbulbs to make the house brighter.
  • Have a dishwasher and make sure it works.
  • Have air conditioning and make sure it works.
  • Change the floor coverings.
  • Update your kitchen with a new paint job.

Whether you are doing a renovation or a cosmetic makeover, you should always have a regularly updated maintenance plan to prevent any big surprises.

As a general guide, you should spend no more than 7% to 8% of your property’s current value on a full renovation and no more than 3% on a kitchen or bathroom (on a $700,000 home say around $20,000). But you should get advice that relates to your own circumstances and expected returns.

The next big question is “how do I fund it”? It is always worth seeking the advice of someone who understands all sides of the housing market before you make your decision. You can fund it out of your cash reserves, take out a loan, use a line of credit or maybe even refinance. Everybody’s circumstances are different so the best place to start is to speak to a Mortgage Broker and even better if you can find a mortgage broker that also has a more holistic view of your finances. ActonLendingSolutions is part of the ActonAdviceGroup and our advisers work to understand your overall current position and can give you the right advice as to how to fund this particular expense.