How to improve your investment property's rental yield

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With capital growth going through a slow patch across much of the country, many investors are investigating how to improve their rental yield. Your Investment Property explores a few smart tips that can boost your rental income and improve your bottom line.

In quiet times you may want to consider boosting the rent on your investment property. Adding an air-conditioner, dishwasher, or a lick of paint for example can increase its rentability.

“Yes it’s an expense that you have upfront, but then you say to the tenant: ‘I’ll give you the dishwasher or the air-conditioner, or whatever it might be, but then I’ll need to increase your rent by $10, $15 or whatever it is’,” says Real Wealth Australia managing director Helen Collier-Kogtevs.

You’ll need to do your sums to make sure that you’ll make a profit in the long run. If an upfront $700 spend on a dishwasher boosts the rent by $20 a week, for example, then the increase in the rent has paid it off within 35 weeks. Include those extra 17 weeks and, by the end of the year, you’ll have paid for the dishwasher and will be $340 better off. Plus, as it’s an asset, you can work its depreciation costs into your tax return.

Empire founder Chris Gray adds that, if you’re borrowing money to make an improvement to the property, it’s even possible for this move to start paying dividends instantly.

He uses the example of a $10,000 renovation that will boost the rent by $100. If you pay for the reno upfront then it will take you 100 weeks to recoup that money through the increased rent.

“But if I borrow $10,000 from the bank at 7% that costs me $700 in interest. So effectively I’ve paid the interest within the first seven weeks, and then I’ve got the next 45 weeks with an extra $100 a month – so I’m making $4,500 on it,” he says. “So, from a cash flow perspective, in tough times you’re generating cash.”

Of course, you still have the $10,000 principle amount on the loan to worry about, so – as well as renovating to boost the yield – you want to make sure that the renovation also increases the property’s value by at least that amount.

A word of warning

Destiny Financial Solutions founder Margaret Lomas, however, recommends that in uncertain times you’d be better off pumping your spare cash into your mortgage – rather than splashing out on improvements to the property.

“I wouldn’t be carrying out any renovations at the moment, whatsoever. Because they’re not going to result in a significantly increased yield,” she says. “In a period of time where the economy has some threat, people don’t pay more for better accommodation. They look for the cheapest accommodation that they can get, and they make do.”

She adds however that it’s of primary importance that your property is at least in a rentable state during such times. So if the state of your property is driving tenants away, you’ll need to open the purse strings to bring it up to a marketable state.

“I wouldn’t be doing anything to increase yield at the present time, except making sure that I had a rentable property on my hands,” says Lomas. “I’d be repairing any drawbacks, but I wouldn’t be making any enhancements.”

Where do you stand on the issue of making improvements to boost your rental yield? Have your say by commenting below or joining the debate in our property investment forum.

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  • Rex says on 24/05/2012 06:22:23 PM

    There's one form of capital accretion that can happen 365 days a year, every year - debt reduction. In addition it frees up cashflow and provides a platform for further growth. The chance to acquire other assets when the market is soft. That comes from available equity and servicing capacity.

    I agree with Chris's thoughts, there are a range of inclusions and/or services that can maximise and stabilise rental income. But in the current climate with vacancies as low as they are, the in built demand will be keeping rents high. When vacancy rates are back at 2006-08 levels, then there's a need to stand above the crowd.

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