Conventional thinking says that anything will do, but this does not apply anymore. Tenants have become more quality-conscious and will become more so in the future. This means that if the condition of the apartment is questionable, it is not easy to rent out. It is definitely worth it to take good care of your apartment continuously.
The profitability of a renovation simply depends on money – on how you can get a high-quality, functional, attractive result with reasonable costs. Many experienced investors have begun to ”standardize” their renovations in order to save time and especially money. These investors always do their repairs with the same pattern, using known partners and similar materials. However, preferences tend to change. As an investor, you should be aware of current trends and what your prospective tenants are looking for and willing to pay for.
Planning a renovation includes taxation-related issues. The type and the timing of a renovation has great impact on your taxes. If you renovate an investment property immediately after you have bought it, the renovation costs are not tax-deductible from rental income. However, you may add the costs of the renovation to the acquisition costs as you are selling the apartment and calculating the taxable capital gain. The repair costs will then reduce your tax amount.
If you buy an investment property in poor condition, taxation-wise your best options are to refurbish it and sell it or renovate it only after you have had a running lease for some time. However, sometimes apartments in poor condition may be priced so attractively that the repairs are worth it even if no tax benefits were immediately realized. More information on taxation is available here.
Do your homework
The condition of the apartment and especially of the housing company and any upcoming renovations are essential in terms of the pricing and your decision. As you contemplate your purchase, make sure to map out all repair needs thoroughly.
The best opportunity to assess repair needs for surfaces and fixtures is at a showing. You should check everything in the apartment meticulously, including kitchen appliances and bathroom tiling. Even minor needs may quickly result in major expenses if there are several of them. However, surface repairs are always relatively much less expensive than major renovations of the housing company. Thus, you should put extra effort on the housing company.
Figuring out the renovation needs of a housing company requires you to look at all the documents. They will tell you what has been done and will help you deduce the need for future equivalent renovations. Current legislation requires the board of directors and the property manager to create an advance report on maintenance needs for the upcoming five years and present it to the shareholders’ meeting every year. In other words, this report includes all anticipated renovation needs. In addition to familiarizing yourself with the housing company documents, you may enquire more information from the seller, the property manager, and the real estate agent.
Your profit calculations should include some allowance for renovations. This reserve can be specified per apartment, based on the mapping of needs described above. Another option is to use an estimated figure. You should always pay extra attention to more expensive major renovations, such as plumbing, facade, roof, elevator, and window repairs.
Renovations affect your rental profit
Renovations often also affect rental profits. If a renovation is a serious detriment to the tenant, you are required to reduce the rent for the duration of the renovation. And if the apartment is completely unavailable, the tenant is not required to pay rent at all for the period of non-use. Rent reductions and exemptions inevitably eat into your rental profits. Plumbing renovations are especially harsh: the period with no rental income may continue for several months.
Always look to predict any lack of monthly rental income, whether partial or full. You should be extra careful if you have taken out a loan to acquire the investment property. This means that your own finances and instalments must be planned according to the renovation schedule, not forgetting the possibility of delays. For instance, it is possible to agree on a repayment holiday for the duration of the renovation with your bank.
As you determine your rental profits, repair costs will reduce them not only by means of lesser rental income but also by increasing your investment capital as a result of the repair costs.
However, renovations improve the condition of the apartment and may upgrade its profile considerably. This improvement should be reflected in the rent. More information on rent increases is available here.