Renovating an investment property for profit is a sound investment, particularly in the current economic environment in which interest rates are low and inflation keeps escalating at levels never seen in the last few years; however, this offers a new perspective to investors; many of us are slowly dumpling the trading of buying, renovating and selling for a more attractive option: owning and renovating a rental property, taking advantage of increasing rents and the expectation of capital growth.
Rental properties is a tax efficient investment as the gross income from rent can be offset against many allowable expenses such as the mortgage interest charged during the current tax year, which is probably the biggest expenses for this kind of investment; however, if the property needs to be renovated, any maintenance and repairing costs can be deduced from the profit; reducing significantly the tax bill and in the case of a loss, this can be offset against the profit arisen from other properties.
Renovating a rental property will add value and allow you to charge a “market average rent” instead of a reduced one due to the estate of the house or apartment; but this is not the only advantage, many investors landlords tend to reinvest the profits by buying a second property for renovation and repeating the process until a healthy property portfolio has been built up.
It is important to keep in mind your future tenants; any renovation project must carefully consider the area where the property is located and the optimum amount to invest – the design, fixtures and fitting, as well as the furniture will depend on your tenant; they should probably be classified as:
- Corporate let (the most attractive and profitable way to let your property)
- Young Professional (second best target as they will look after your investment)
- Short let (higher rent but profit will depend on the rate of occupancy)
- Housing benefits.
Each tenant will have a different demand and expectation. Students would expect to be within walking distance to college; young professional will demand to be close to the train station and have good transport links and a young family would expect to have a good school in the local area. When renovating a property you must consider all the attractions in the local area, as it will give you an indication of the best investment-rent ratio.
Location and Investment
The amount of money to invest during the renovation project will depend on the area where your rental property is located; if it is on a desirable location such as Manhattan or Central London, this will give you a blank canvas as you know you will easily recover your investment in the form of higher rent and capital grow in a short period of time.
Investing in a well-know area is highly recommended; however, you can strike gold if this area is local to you as will give you the opportunity to maximise your investment by buying only houses or apartments at a reduced price; but will also give you the change to project manage any renovation project or simply to assess and plan your own DIY renovation project; however, they must be offset against the potential capital gain.
Managing agents fees can be quite costly and although you can deduct is from your gross profit; there are occasions in which the property is let unoccupied for long period of times which means no rental profit; however, some management fees are still due. Managing your own rental property might be cost effective in some situations and will give you a better control in the type of tenants you have as well as any maintenance costs incurred.
Accountancy fees should also be considered and although income tax and capital gain tax can be calculated and submitted by any person; a professional accountant will provide a legal and effective way to reduce the money owed to the taxman; this is particularly important if this is your first rental investment.
Prospects of the Property
Buying a property is not an easy decision and deciding how much money you would invest to renovate it, it is even harder for many people starting with this challenging but highly rewarding profession of buying to let and becoming a landlord. The main considerations are:
- Capital growth: adding value to the property by renovating.
- Profit: the actual profit from the potential sale of the investment; once all expenses have been deducted.
- Regular profit: the rent you could charge by the specs of the renovation project and location.
Renovating a house during an economic downturn might not produce the profit you would expect; however, this could be the best decision in the long term, as it will increase in value once the financial prospects improve. Although property prices decreased during the recent financial meltdown, rents kept rising, as less people were able to buy a home. A good rental yield is important but capital growth should be your main objective.
Design and Specification
The specification is directly linked to the type of tenants your property is more likely to attract; however, the design must be primarily focus on maximising value by creating a more specious and neutral space; this is particularly challenging if the rental investment is in New York, Paris or London, as property tend to be smaller than in other areas, but learning how to decorate a small apartment is fundamental and will increase the rent yield you are likely to receive.
Planning Permission and Timing
Depending on the type of renovation, you might have to apply for planning permission, this will delay the renovation project and if not approved, a different design should be considered; timing is important as the sooner you can have a tenant, the quicker the money you will receive to refinance it and buy the next property. One way to maximise your profit is to be your own project manager and coordinate the different contractors that will be working in your property.