What you need to know before renovating an investment property

What you need to know before renovating an investment property
What you need to know before renovating an investment property

As a first-time property investor, there may be a number of reasons why you want to renovate your investment property. Maybe it was previously your home and you want to give it a facelift before opening it to tenants, or you purchased a ‘fix-it-up’ property to turn into an investment. 

No matter the reason, renovating an investment property is substantially different to renovating your own home, as the priorities aren’t the same. There are some key things to consider before completing a renovation to ensure the best return. 

Here are four key considerations to consider for investment property renovation projects:

Install assets that boost cash flow sooner 

Depreciation is the natural wear and tear of a building and its fixtures and fittings over time. Plant and equipment is one category of depreciation. The plant and equipment assets of a property are easily removable, such as carpets and lighting, and are generally depreciated over their individual effective lives. 

Each asset’s effective life determines how much you can claim back each year. This is a key consideration as some assets will let you claim more sooner. 

For example, window blinds have an effective life of ten years, and when using the diminishing value method of depreciation, a rate of 20%. However, curtains hold an effective life of six years and depreciate at a higher diminishing value rate of 33.33%. This means that you would claim back more sooner from curtains than blinds. 

Renovate key areas first

It’s no secret that renovated properties attract an abundance of tenants. When you’re only able to renovate part of the property, focus on the areas that will win tenants over. 

For example, a kitchen or bathroom are key rooms tenants look at when searching for a rental. It may be more worthwhile to invest in improving one of these rooms instead of a study or hallway. If you’re looking at a smaller scale, replacing old carpet throughout the property or painting the interior makes a big difference to a property’s perception. 

Scrapping

When you remove items during a renovation, such as flooring or bathroom fixtures, they can still boost your cash flow. A balancing process called scrapping allows you to claim any undeducted value of removed items as a total tax deduction. This deduction is in addition to the first-year depreciation deduction on the new assets. 

Yes, that means you can get money from things that you were going to throw away. Sounds too good to be true, right? 

To make sure you can claim scrapping you must have a tax depreciation schedule completed before and after the renovation. If these steps are missed, you will miss out. 

It’s also important to note that if you live in the investment property while completing the renovation you can’t claim depreciation on the newly installed assets. This is because they will be classed as ‘previously used’, making them ineligible. 

Low maintenance and high durability 

Another factor to consider when choosing assets is how durable they are and the level of maintenance they require

It’s always preferable to have low-maintenance assets installed when renovating an investment property. A renovation is a costly exercise, so you also want to make sure anything you install is durable.

Bradley Beer

Bradley Beer

Bradley Beer joined BMT Tax Depreciation in 1998 as a Quantity Surveyor before becoming a director and shareholder in 2002. Since then, he has been instrumental in building BMT from the ground up and became Chief Executive Officer in 2015.

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