Add to property value without breaking the bank!
As a rule of thumb, for every dollar you spend, you add to property value by $5. At least, that is the aim when renovating to improve the capital value of your investment property.
When you're talking about increasing the rental return, renovations can add between 20%-50% to the rental price, and sometimes more.
This doesn't apply to everything you might need to do to a property though, so when buying a property with an eye to adding to property value, you need to think about a few factors:
The location of your chosen property, and its corresponding market value, will have an effect on the cost of the finishes you will choose to install.
Putting a $30,000+ state-of -the-art kitchen with granite benchtops and top of the range stainless steel appliances into a property worth over $700,000 is often appropriate (although you can get away with spending less!).
Spending this on a $250,000 property (in Australian terms - I know this can buy a lot in America) will not give you a reasonable return. It is more reasonable in that case to spend around $5,000-10,000 on replacing a kitchen, and buy other fittings that cost proportionally less, this way you will add to property value for minimal cost - maximising your profit!
A property that is in "bad condition" can be a boon for investors, because you can do so much more to add to property value. What you have to remember is that something that looks bad (and costs considerably less than the average for the area) might only need a coat of paint, a bit of a tidy-up, some floors sanding or re-carpeting, new light fittings, and a spruce-up in the bathroom and kitchen.
What you are really looking for is cosmetic work to do.
Always, always have a certified building and pest inspection done on your property, independent of anything a vendor or real-estate agent might offer. Do not be tempted to forget about it, or just take certificates by an unknown party at face value. It has been known for people to buy a property that belonged to pest-inspectors, after taking their word that they had done all the inspections and given it the all-clear... only to find that the entire property was riddled with termites after settlement!
Things which require major repair work can make a property investors dream into their worst nightmare, so if you need to add to property value to get more value back out, have a look below, and then do your sums!
3. Types of things needing repair.
Some things you do to a property will really add to property value, while others will not.
When you are pricing up a property, the cost of renovations, and the return you expect to make on those renovations, you need to consider if it is worth buying at all when there are things to be done that won't enhance your return.
Repairs and replacements which won't add value include
The reason that none of these will enhance your return is that anyone moving into your property (or buying it later) expects it to be in a good, safe state of repair. Replacing a gutter, roof, or hot water system because it is leaking is something you simply have to do to keep a property in good repair. Electrical wiring and termite-ridden or rotten timber framing are all things which tenants expect to be safe, as are water-damaged ceilings as a result of the leaking roof.
They will not pay more to rent your property just because you announce that you've fixed them. They will simply not offer you less.
It is worth noting to those who decide that they need to sell after a renovation on a property they initially planned to rent out: mentioning a new hot water system and gutters (and providing copies of receipts for the work showing the date) will at least mean that buyers are less likely to take money OFF your asking price if the work is already done, and done recently.
It's not a guarantee that they won't bargain you down, and is certainly not a reason to raise the price if the asking price is already on par for similar properties in renovated condition in the area. If in doubt, ask another real estate agent to show you similar newly-renovated properties in your suburb, and then compare the prices!
Things which will add to property value:
While you can see it's not quite as simple as ripping everything out and replacing it, you can add to property value by carefully choosing the right materials and not spending too much! Just remember to do your due diligence first!
Have we missed a value-adding question you'd love to know the answer to? We'd hate to miss anything...