All businesses face a common dilemma, and that is how to spend enough to get a great return on investment. Property investment is also a business and it has the same underlying fundamentals and challenges including the fine line between underinvestment and investing too much.
Property investors are not familiar with running a business make mistakes that either stop them purchasing more properties or at worst force them to sell the investment properties they have to stop the need to top up the difference between rents and expenses.
Strategy To Improve ROI
When you’re starting out as an investor in real estate, each rental property must work well in your portfolio so your ‘business’ is ideally cash flow positive or at worst cash flow neutral. If your portfolio is cash flow negative you’ll be required to fund the difference i.e. what money is required to pay expenses like rates, maintenance etc.
Your strategy may be to fund the difference in the short term until you have renovated one of your properties to increase rental income return and thus reach a cash flow neutral or positive position. There is a rule of thumb that whatever amount you invest in a property needs to give you three times the value. Now, this value can be calculated in many ways including the rental income and also the capital gain or property sales price.
Of course, the biggest challenge is knowing where to put your money to boost your return and avoid wasteful spending. Earlier we mentioned successful property investment portfolios are run like a business and as such, there is no emotion in the purchase nor the renovating of property.
Property Investor Tip
As we all live in homes and it’s in our psyche to ‘make better’ or improve our living conditions. Therefore it’s hard to remove the ’emotion’ we feel when we’re buying or renovating a property. This emotion will squeeze more money out of you and it is the underlying mistake of novice property investors.
Do not renovate your rentals to your personal preferences rather than what the property requires to achieve your goals i.e. increase rental return and in the long term get more capital gain.
Your property investment goals need to be committed to memory or written down and referred to often so they become second nature to you. Create goals for your property purchases and how you plan to increase its rental return for your portfolio. All properties deteriorate over time even with ongoing maintenance so you will also need goals for your renovations.
Frugal Investor Renovation Tips
Squeeze every penny
Here are some tips from successful property flippers on how to add value to your property without it costing more than your budget;
- Do as much hard labour yourself to save on hiring builders.
- Get as much as you can direct from the manufacturers.
- Get quotes and compare prices for things you can’t do yourself like plumbing and electrical.
- Find a home where most of the changes required are merely cosmetic rather than structural.
- Never underestimate what a lick of paint can do!
- Remember that home buying is an emotional process so make aesthetic choices that contribute towards making buyers feel a certain way.
Know beforehand why you’re renovating the property, and this is where your goals steer you in the right direction. Renovating to sell is completely different from renovating to rent and achieve a higher rental income. When you renovate to sell your focus is more on visual appeal to attract interest from homebuyers when they visit your home. Cosmetic improvements will impress prospective buyers and well as decluttering and staging your property for open home viewings
Whereas when you’re renovating to achieve a higher ROI with the rental income your focus is on providing more ‘nice to haves’ for tenants. Tenants need to be motivated to pay more rent. Some nice to have additions may be an updated kitchen or bathroom with better appliances. Fast online connectivity. We all know how connected people need to be today and while they’re at home they want to connect to their home WIFI so fast online uploading and downloading will surely impress your tenants and this requires the right cable or fibre connected to the property.
Mistakes to avoid
As well as making prudent spending choices, it’s also a good idea to steer clear of the following mistakes;
- Living in the property – It might seem sensible but it can delay timeframes and lead to a fortune spent on living expenses like costly takeaways.
- Overspending – Research what drives buyer or tenant demand in your area and spend accordingly.
- Know your market – Many a landlord has sunk their savings into a money pit because they didn’t research the local market.
- Avoid refinancing your own home – Ideally, you’ll avoid using your home to fund the renovation of an investment property unless you’ve done your research and you are absolutely sure that the risk will pay off.
Run your investment properties like a business and apply the same fundamentals to secure a profit. When renovating know at the outset why you’re renovating is it to sell or to rent? Your renovation budget and strategy will differ for each outcome. Update your goals for each rental property too. Your personal circumstances will change over the years and with it your reasons for having investment properties. With a well thought out strategy, your ROI will be healthy.