Deciding whether to renovate a rental or not?
With so many shiny new apartments on the market for rent, many landlords wonder if their older property can compete in its original condition.
Because there are lots of variables, we’ve put together this guide to help you decide if renovating is the best choice for your rental.
The answer to this question is different for every landlord, so always consider:
- whether your circumstances allow renovating
- how it could affect your tax position
- whether renovating will improve rentability
- what return on investment to expect.
The key consideration is your circumstances. Renovations won’t always increase income — so only renovate a rental if you can afford to, and will see value from the improvements in the long-term.
Make sure you consider whether you:
- want to positively or negatively gear your property
- have sufficient funds (or can justify borrowing)
- can handle the loss of rent while renovating
- will find it problematic if the renovation does not increase rental income.
Speak to a financial advisor and your property manager for help in weighing up the risks and benefits.
Your tax return
When you renovate a rental, the work you do may be deductible after the property earns rental income.
Other factors to consider include:
Capital works vs non-capital works
‘Capital works’ are works that improve or structurally change a property. They are not tax-deductible in the same way repairs and maintenance are. However, a percentage of the cost may be depreciated each year based on the ATO’s view of the life of the item.
Examples of capital works include:
- a new garage
- a new fence
- installing air conditioning for the first time.
Renovations that replace or repair existing amenities are not ‘capital works’ and will usually be tax-deductible. They maintain, rather than significantly improve, the property.
For example, replacing a hot-water system with a similar model is a tax-deductible expense. Whereas replacing a gas hot-water system with solar panels is a capital work.
Maintenance costs can usually be deducted in the same tax year.
Negative vs positive gearing
‘Negative gearing’ is the practice of choosing to make a loss on your property. Deductible expenses help to reduce tax payable on other income.
Landlords who negatively gear have less need to keep costs low, and more freedom to renovate.
On the other hand, Positive gearing means trying to profit from the property. Vacancy periods may be difficult for these landlords and they usually need improved rental income to justify renovation costs.
Before making a decision, speak to your property manager.
“Rentability” and return on investment
A crucial consideration is how renovating may improve “rentability” and what return on investment is likely.
Before you decide to renovate a rental, talk to your property manager about:
your target demographic
The type of tenant you target will help decide whether to renovate or not. For example, students often prefer low rent to a modern kitchen. Professionals prefer newer fixtures.
To understand your target market, speak with your property manager.
your property type
Tenant expectations may depend on the type of property you have.
For example, newer apartments are expected to have air conditioning, whereas a tenant looking at an older home may care more about whether it has fencing to protect children or pets.
your cost/benefit ratio
Before renovating a rental, consider:
- your renovation cost
- the likely increase to your rental income
- the timeline to recoup costs.
If your renovation is significant it may take years to recoup costs. This may mean renovating is not viable.
Your property manager can help you to figure this out.
To sum up
The decision to renovate a rental is complex, and there are many variables to consider. But talking to your property manager can help you to make a strategic, cost-effective decision.
At We Love Rentals, we’re passionate about assisting landlords to make decisions that benefit them in the long run.
To get in touch with our team of experienced, rental-specialist property managers, call us on (08) 6254 6300!