Minimal maintenance VS capital improvements

28-Apr-2017

Whether you own one investment property or your property investment portfolio is well established, it’s important to determine the purpose of each of your investment properties and budget accordingly.

Why is this important?

Understanding your goals for each investment property allows you to determine how you will manage each one.  Will you spend as little as possible on it (just enough to meet all safety requirements and keep it adequately maintained)? Or will you invest in the property to bring it to an above average standard in the market in order to attract a premium tenant? Perhaps somewhere in between may suit you best.

Think of your property as you would holiday accommodation. Is it 2-stars, 5 stars, or somewhere in between? Then think of the location. What are the majority of tenants in that community looking for in a home? What type of property is in high demand - 2 star, 5 star or somewhere in between? What type of properties are moving quickly for a good price and why?

How would you rate your investment property (or each of your properties if you own more than one) right now?

  • The 2 Star Property

At this base level, there are a few non-negotiables. As a landlord it is your responsibility to provide a safe and healthy environment for your tenants and their visitors. If you can’t afford to maintain the property to this absolute minimum standard you need to speak with your property manager about divesting yourself of the asset and, if that’s not an option, you must cease renting it out immediately. There are no circumstances under which it is OK to put people's health and safety at risk. But if your property meets the minimum standard in an area where most tenants are looking for affordable options, then it’s perfectly fine to maintain your property at this level.

  • The 3 Star Property

At this mid-range level the property is maintained to at least the minimum standard expected within your neighbourhood. Some minor aesthetic improvements like paint and flooring or major renovations completed 15 - 20 years ago might increase your rating to 3 stars. One level above the minimum requirements should attract a reasonable quality tenancy and gross annual yield in a relatively strong market. Allowing the property to deteriorate back down to a 2 Star rating however would extend your vacancy periods, weekly rental return and potentially attract either a less house-proud tenant or someone who struggles to make their payments. Not improving the property could also see higher vacancies and rent decreases if the market tightens.

  • The 4 - 5 Star Property

Invest to improve the property to above the average standard expected in your neighbourhood and your property star rating would increase to a 4 or a 5. At this level, your property would certainly attract a higher quality tenant in a shorter time frame and increase your gross annual yield with longer tenancy tenure and a higher weekly rent. Improving the property will also increase your depreciation allowance and add value to the balance sheet.

Your managing agent can help you appoint the right people in compliance checks to ensure all your non-negotiable compliance needs are met. They can also help you identify the right star rating to suit your circumstances as well as help you establish a maintenance plan and budget to suit your investment goals. Most good property managers work with a network of reliable tradies from whom they can obtain price indications to help with the planning and budgeting process. You could also ask them to help you establish a savings plan, whereby they would allocate an agreed portion of your rent into a savings account for future expenditure on the property.