Maximise What You Already Have
Rather than trying to buy another property, have you considered maximising what you already have?
What opportunities do you already have within your personal house or rental property portfolio?
Often, property investors are starting to look in less desirable areas and at less desirable properties in an attempt to get a reasonable return. In my opinion, a lot of these are not great investments long term, and often it is a fear of missing out that is driving the purchase.
Here are some areas you can look at, instead of forcing another purchase:
1) Simple renovation of existing rentals
Often the easiest way to improve rent is to renovate a property. I would typically look for and expect well over a 10% return on investment. That means if you spend $20,000, you want at least $2,000 per year in extra rent, or an extra $40 per week approximately as a minimum.
A great idea is to talk to your property manager:
- "How much would rent go up if I add a heat pump?" (Note: Make sure you understand Healthy Homes requirements before doing this!)
- "What things should I do to the property that would most increase the rent?"
If you do a really smart renovation, you might get closer to 20% return on investment, which is fantastic.
The cashflow from a renovation can be great long term. You might borrow $20,000 at 3.5% interest, costing $700 per year. If you make $2,000 per year in extra rent, that gives you an overall increase in cashflow of $1,300 per year.
2) Can you add bedrooms to existing rentals?
If you have a 1 to 3 bedroom property, I would look at options to increase the number of bedrooms:
- Is there a second lounge that can become a bedroom?
- Can the garage be converted into a bedroom?
- Can a room get split in two to create an extra bedroom?
It is very important to make sure any renovations like these are done legally!
Often, adding a bedroom will add equity as well as cashflow.
3) Can you rent part of your personal house to a flatmate, boarder or Airbnb?
I have done previous blogs on boarding rules, but the main difference is:
- Boarders are more than just a room and requires regular meals. If the income is under the threshold, the income does not need to be returned for tax (no tax).
- Flatmate or Airbnb income is taxable.
Any of the above three options can be a great way to bring in extra income with little cost.
4) Can you put minor dwellings on the back or front of any of your rentals? Or subdivide and build another rental? Or subdivide and build a duplex?
Minor dwellings are generally good for cashflow but not so good for equity. You also need to consider what would happen if you have to sell. Who will you be selling to? First home buyers or home buyers don't normally want two houses. That leaves large families or investors, which could make selling hard or reduce your value.
A smart subdivision or duplex should be good for both cashflow and equity. Be careful if you have to sell, as often if you subdivide and sell, the gains are taxable.
5) This one is often overlooked - What can you do with your personal home?
Can you add a minor dwelling or subdivide or build a duplex? For subdivisions, there are some great exemptions that can be utilised for tax purposes!
I hope after reading this, you will consider what opportunities exist within your current rental properties, which will hopefully improve your cashflow and equity as a result!
Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.
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