Garage Conversions Are They Exploitation Or Value-Add?
Renovating a property’s garage or outbuilding into a ‘utility space’ increases the property value and homeowners want them. Investors also see the value in them too as the extra space achieves more rental income. For example, a 3 bedroom home with a large ‘utility area’ (garage conversion) rents for more than a similar-sized 3 bedroom without the extra indoor area.
However, this add-value strategy a favourite of property traders (flippers) doesn’t please everyone and depending on your point of view turning a garage into a games room, or as real estate agents are happy to imply verbally to prospective homebuyers, an ‘extra bedroom’ is seen as exploitation so is it really? No, and yes.
Homebuyers are not being exploited however when the property is a rental, there is an argument that the tenants might be vulnerable to using the new space for purposes it’s not fit for i.e. a bedroom.
From a homeowners perspective we happily renovate the home so why not also get more indoor space from converting unused buildings for enjoyment? Instead of using the single garage for storage, homeowners and investors have realised the demand for more homes with extended ‘living spaces’.
Some critics say the ‘exploitation’ occurs in the terminology or property description of the listing and also what’s inferred by listing agents at open home viewings. There are laws that define habitable spaces and therefore you can not call an area a ‘living space’ without the sign off aka building consent and code of compliance. To get around this requirement, the term ‘utility’ area is used.
Homebuyers are mostly unaware of the legal requirements for habitable spaces so when they view property for sale with a renovated ‘garage’ they are likely to suggest how they’d use it i.e. as a ‘bedroom’ and they’re seldom informed to the contrary.
It’s not until their lawyer is engaged for the property’s sale agreement that they learn it is not fit for purpose and that using it as a liveable space may have insurance implications but that doesn’t deter them they go ahead and purchase the home so this is a clear case of ‘caveat emptor’, aka buyer beware. There is no exploitation occurring here however there is an argument for tenant exploitation when these properties are used as rentals.
Rental Property Shortage
A lack of rental property listings has increase rental property demand and more dubious landlords have recognised a way to raise rents – by converting garages into non-compliant liveable spaces. Tenants are paying more rent for the extra space that they use as a bedroom. This is exploitation when the conversions are not in accordance with the habitable spaces law.
Landlords Feeling The Pinch
The need to squeeze more rent from a rental property can be attributed to new tenancy rules and regulations which are making it harder to get a reasonable return on investment. In earlier blog posts we have covered the tweaking of measures to improve tenants living conditions and how they have put a lot of financial pressure on landlords.
Most of the new tenancy requirements are considered reasonable by property investors albeit reluctantly as they need to fund the additions and justify the legitimacy of their business.
Installing heating, insulation, and extractor fans are costly and the expense can not be passed onto the tenants immediately as there is also a rule in the tenancy agreement for how often rent rises can occur and in many countries, it’s now an annual event with a minimum of 60 days notice.
Therefore it can be months before the landlord sees any clawback of these expenses and this lag is hurting landlords in the pocket. Investors need to get a reasonable return on their investment i.e. more than what they can achieve should they put their money into shares or managed funds.
With this as a goal, owning rental properties is a business so it needs to be solvent and while there’s debate over whether rental properties in a limited company structure are considered a ‘business’, for all intents and purposes the rental income must cover all outgoings with some leftover for emergency repairs and a ‘dividend’ i.e. regular payment the investor.
Adding Value To Rental Property
Adding value to the asset makes sense. For the property to attract optimum income, it must have what the tenant needs and while there is a lack of rental properties tenants want the homes with more ‘space’. However, as explained earlier on there is a right and wrong way to get it.
When underutilised outbuildings like garages are converted to habitable spaces within the law there’s transparency and legitimately that pleases everyone, including critics of the strategy.
To stamp out any chance of exploitation of the garage conversion more new homes are required for renters and homebuyers.