Re Investing Back into my Rental Property – When & How Much?11 Jul 2019
Recently I have had some interesting debates with landlord clients – how much and when should I be investing back into my rental property? And if a property needs more extensive works – how do I decide whether it’s worth doing the works or whether to sell it and do something else with the funds?
These questions have come up twice in the past couple of weeks relating to real properties.
The first case study is a property which generates £450pcm in rent and is valued at around £45-50k. So it’s a high yielding, low-value property which generates a low monthly rent and the condition of the property, while acceptable, is not fantastic. Realistically it needs a new kitchen, new bathroom and importantly a new heating and hot water system. We would estimate it needing a spend of £6-8k within the next couple of years and £1500 spend immediately. The landlord is not keen to spend this amount of money on the property as they feel it eats up too big a proportion of the income. So it would take 4 months to generate any income at all and even then it still needs money spent on it. It’s true that the spend is a big proportion of the value of the property however ALL rental properties need money spent on them and the cost of a new boiler, for example, is no different whether the property is worth £50k or £150k!
Landlords need to consider the long term return on the investment, so your decisions should be based on your long term plan or your exit point. If this landlord plans to keep this property long term then it’s simple, if you are able to, then do the works now and keep the property. A spend of £8k on this property now will mean the investment should not incur so much expense in the next 5 years or so, it will generate a little more rent, maybe £500 and attract a better tenant. The return on this will be over 10%. A brilliant return still. If though the landlord is planning to sell it in the next 1-2 years then possibly the best decision would be to sell it now. Spending £1500 on a boiler when realistically any potential buyer is going to want to do a full refurb is probably not worth it and the price you achieve will likely not reflect the investment you made in the new boiler. The point here is when deciding what and when to make big spends depends on your long term plan.
All landlords need to remember that spending on properties is inevitable, and in the case of flats, the communal areas too. There is general upkeep of the flat in order to attract and keep a good tenant paying a good rent, and also the regulatory spend too. We would estimate budgeting about one month’s rent a year on general upkeep and every 4 years or so redecoration will probably be needed. It’s not a one-way street –tenants pay rent but they expect and deserve a good product!
Case study 2 – Another landlord recently had a tenant living in a property for 12 years – wow – and he really hadn’t spent much on it other than regulatory testing and some small repairs. After 12 years he was frustrated that he had to spend £2000 on the property in order to bring it up to a good condition to sell it. I had to be honest and tell him that I thought that was a perfectly reasonable spend and he had done pretty well for 12 years.
Generally, unfurnished properties probably need a lesser spend, at the least, there is no furniture to worry about and also the length of a tenancy tends to be longer. It’s generally true that a property which turns over more tenants will need more repairs/ redecoration. But these are the properties which can offer good solid investment and higher rent so it’s a tradeoff!
At the very least you should be considering redecorating every 4-5 years and possibly new carpets every 5-7 dependent on the room (how much foot traffic it has), furniture needs refreshing, mattresses need to be replaced every couple of tenancies dependent on the length, carpets may need to be shampooed and things like mattress protectors and shower curtains need frequently renewed.
Rental property can make a great investment if you choose wisely, are clear on your time frame and know your exit strategy, but you must ensure that they are kept up to scratch to attract good tenants.