ROI - Return on Improvements

[cube]

Hi,

When doing improvements to a property, there is an oft-quoted rule of thumb that you want to increase the value by $3 for every $1 you spend on improvements.

Does anyone have a similar rule for how much you should aim to increase the rent by? Should the increase only cover the cost of the increased debt, or should it always add to the cashflow (or reduce the -ve cashflow) from the property?

Or, are improvements (and maintenance) all about preserving and increasing value, and any rent increase more dependent on the market at the time than the quality of the property?

Thanks

cube

[whitt]

Good question.
IMHO latter. I guess it really dependant on what level rent is prior to reno and the time of year, property cycle etc.

I have tidied up a place previous and rent increased slightly but it rented quickly and maintenance issues were eliminated. Generally I feel it was money well spent.

Potentially if you had a under rented place or a dog box in a nice area your rents could rise more.

I treat any rise as a bonus similar to any tax refund I may get.

[spurner]

renovate for PROFIT

I don't think it's feasible to increase rentals for maintainence, it's of no real value to a tenant if you replace the roof, the hot water cylinder or drainage, these are things which are supposed to be provided regardless, and if you don't, then you have a problem!

Improvements on the other hand obviously attract better tenants, get better rents and increase the value of the property. It would be silly to restrict any rental increase simply to cover servicing the debt incurred in undergoing those improvements. You want to make a profit, and a big one too.

The rent obtained and value of the IP are usually intricately linked. So, if you have an IP returning you 6%, you spend $10k on it, you would have to expect a rental increase of $11.54pw. Of course you can't really 'expect' it, you will only get what the market expects to pay.

If you can't get the extra $11.54pw then it's debatable whether you've really increased the value of the property at all. If you can't get the $11.54pw you'd have to wonder if it was really worth it?

I typically spend $4k-$15k on my reno's (all B&H flats) and increase rents from $10pw-$60pw. I often find the less I spend the better return I get, but this depends more on the state the flat is in.

As a rule though, you'd want to get at the absolute least a 6% return on your outlay, if you don't then it could be said you've overcapitalised. IMO a 10%-20% return on your improvements is a good figure to aim for.

[RentMaster]

A simple formula I used is
(expected increase in rent * 52) / improvement cost.

This is similar to the simple yield formula
(rent * 52) / purchase price

So this formula give you a sort of yield return on the money invested. The higher the better.