How to work out your ROI for rental property renovations
In this article, we’ll show you how to evaluate the potential benefit of renovating your rental property. You’ll see that simple improvements can often generate a solid return on investment (ROI).
How to work out the potential return on improvements to your investment property…
Formula: Estimate the rent increase per year after improvements are complete, and divide that into the cost of the renovation.
For example, imagine you renovate your kitchen between tenancies and spend $8k. We’re not talking about a brand new kitchen here, but maybe a new benchtop, a new stove and a repaint of all the cupboards and walls.
As a result, you may be able to obtain a higher rent. Let’s say, $20 per week.
Note: Speak to your property manager for an educated opinion on what sort of rent you could achieve after renovations.
To work out your return on investment, calculate the rent increase over a whole year ($20 x 52 weeks = $1,040). Now divide that into the cost of the renovation ($8k) and you get 0.13. You can look at this as a percentage (or just multiply by 100) = 13%.
It’s hard to find a better return on your money than that!
You have also increased the value of your investment property, often by more than the cost of the improvement.
Note: Talk to us for an up-to-date market appraisal and advice on how much you can improve the value of your property through renovation.
A few more examples…
Let’s say you spend $4k on new carpet and as a result, you can increase your rent by $10 per week.
$10 per week is $520 per year. $520 / the initial investment of $4k is 13%. So by investing $4k you are earning $520 per year. In other words, you are earning a 13% return on your money.
Let’s say you could add a garage for $30k but could earn an extra $50 per week in rent as a result. That’s an extra $2,600 per year, which is an 8.6% return on your initial investment.
Key points to consider
- The initial value of your investment is held in the property. You can’t easily take the money out again like you could with a term deposit.
- The value of any renovation drops over time. If you add a new kitchen, you might need to replace it again in 20 years.
- Improvements like a garage may provide a lower return but will last a lot longer.
Reasons not to renovate
Owner: “It’s a rental property. Any upgrades will just get worn out anyway. Why bother improving it?”
Answer: Because you will increase the value of your investment property and you can earn a return on your investment. Tenants also appreciate living in a well-cared-for property.
Owner: “If I upgrade my rental property it’ll be nicer than my own home!”
Answer: This may be true, but you can’t charge rent for improvements to your own home.
Owner: “I don’t know enough about renovating. I’m not sure who to talk to or where to start.”
Answer: You could look at hiring a property manager to manage your investment. They have a collection of tradespeople who will do small jobs at short notice. Or reach out to our team and we can put you in touch with tradespeople we personally use.
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