Should I renovate my investment property?

Should I renovate my investment property?

Are you trying to decide whether to renovate your property or make improvements before the next tenants move in?

Is it time your property had a bit of a spruce up but you don’t know if it is worthwhile?

If you own a rental, you have probably asked yourself this question each time a tenant has moved out:

Should I renovate my investment property?

The key to finding the answer is to look at the return you will receive.

In this post, I will take you through the math behind making improvements and hopefully show you why renovating your rental property can be one of the best investments you will ever make.

Some owners think it’s not worth bothering.

Reasons not to renovate include:

  • It’s a rental property. If I put new chattels and fixtures in there they will just get worn out anyway. Why bother upgrading it?
  • If I upgrade my rental property it’ll be nicer than our own home!
  • I don’t know enough about renovating. I’m not sure who to talk to or where to start.

We’ll answer those questions (or point you in the right direction) before the end of this post. But first…

Do you know how to work out the potential return on improvements to your investment property?

The easiest way to do it is to 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 $7k. We’re not talking 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 are able to obtain a higher rent. Let’s say, $20 per week.

To work out your return, calculate the rent increase over a whole year ($20 x 52 weeks = $1,040). Now divide that into the cost of the renovation ($7k) and you get 0.149. You can look at this as a percentage (or just multiply by 100) = 14.9%.

You have also increased the value of your investment property, often by more than the cost of the improvement.

Hard to find a better return than that!


Understanding Opportunity Cost…

Before you spend money on anything, it is important to consider your opportunity cost. Eg. what else you could do with your money on instead. In this scenario, let’s look at other places you could invest your money, instead of renovating your rental, to see how the returns compare.

First up, let’s take a look at the old term-deposit to provide a comparison.

View best term-deposit rates in NZ (via interest.co.nz).

At the time of writing (July 2019) the best available rate for a term-deposit is provided by Rabodirect at 3.6% per annum.

The other alternative for most NZ homeowners is to pay off your mortgage. Most 1 year fixed rates are around 3.8 – 4%. So essentially, if you are able to put any extra money towards paying your mortgage off you are earning 4% return on your money (you won’t have to pay interest on that money in future). It’s even better than that though since you don’t pay tax on this ‘return on investment’, while on term deposits, you pay tax on the money you earn.

So the way I think about it is: That 4% return you earn by paying off your mortgage is equivalent roughly to a 6% return on any other investment where you have to pay tax.


Back to the rental property…

Let’s run a few more examples to see what sort of return you could get by investing in improvements.

Let’s say you spend $3k 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 $3k is 17%. So by investing $3k you are earning $520 per year. In other words, you are earning 17% on your money. More than 4 times better than a term deposit. Crazy, right?

How much more rent could you earn if you upgraded your kitchen & bathroom? Let’s say you invested $15k but could achieve $50 more per week in rent. That’s $2,600 per year, which is a 17% return on your original $15k.

Let’s say you could add a garage for $25k, but could earn an extra $50 per week in rent as a result. That’s an extra $2,600 per year, or a 10.4% return on your initial investment.

Not only that, you are adding value to your property at the same time.

Key points to be aware of:

Based on the numbers above, it would appear that renovating your investment property can be a really good investment. There are some key details to consider though…

The initial value of your investment is held in the property. You can’t easily take the money out again if you need it like you could with a term deposit. You can possibly refinance, to release the equity at a later stage, but that can be a time-consuming process.

It’s also important to note that the value of the renovation drops over time. If you add a new kitchen, you’ll need to add another one in 20 years. Improvements like a garage may provide a lower return but will last a lot longer.

Isn’t this all just a way to increase rents?

This article is not about helping you find ways to up the rent in a market where tenants are under the pump. This is general advice for owners who charge a fair rent for their properties.

On that note, you should add a heatpump and as much insulation as you can to your rentals as soon as you can afford to do so, without upping the rent, because everyone deserves a warm, healthy home. This improvement still adds value to your asset, even if you don’t increase the rent as a result.

Read: Healthy Homes standards (via tenancy.govt.nz)


Before you go, let’s cover off those initial objections:

Reasons not to renovate include:

It’s a rental property. If I put new chattels and fixtures in there they will just get worn out anyway. Why bother upgrading it?

Answer: Because they increase the value of your investment property and you can earn a return on your investment.

If I upgrade my rental property it’ll be nicer than our own home!

Answer: This may be true, but you can’t charge rent for improvements to your own home. So improving your rental property is more of an investment than making changes to the home you live in.

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. Alternatively, if you want to keep managing the property yourself, you could ask friends for a recommended builder/handyman. Or reach out to our team and we can do our best to put you in touch with people we personally use.

Looking for renovation advice? Check out our podcast with Jamee Colman from Namloc Build.


Still working on nabbing your first investment property? Check out our interview with Chris Leatham for inspiration.

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Andrew Duncan

I love working with nice people, enjoying plant-based food, CrossFit, NFL and living in Wellington, New Zealand.

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