Renovating an investment property has many benefits that can range from improving your ability to attract quality tenants to increasing your potential capital gain. But if you’re planning on renovating – whether it’s a big overhaul or small improvements here and there – there are some key things to consider that will help you get the best result.
Viewing your investment property with a ‘head over heart’ approach is essential. You’re (most likely) not intending to live at the property, so your personal property preferences shouldn’t take precedence over what will deliver the best outcome for your investment. You should keep your target market front of mind throughout both the planning and renovating stage.
A renovation provides a blank canvas to better tailor your property to attract your preferred tenants. For example, if your target market is a small family and you’re doing a full bathroom renovation, it’s important to include items that make the space practical and child friendly, such as a bath.
Maintenance is another factor to consider when choosing what to include in your renovation.
Low maintenance is always preferable for investment properties. You don’t want to update the outdoor space that requires extensive landscaping. Similarly, indoor luxury assets that require high attention and upkeep aren’t ideal either.
It is essential that you choose colours, fixtures and furnishings that won’t go out of fashion either, so you don’t have to re-do your reno regularly. The safest bet is to stick to neutral colours or use a consultant to guide you.
Depreciation is the natural wear and tear of a building and its assets over time. Only owners of income-producing properties can claim depreciation as a tax deduction. You need to consider the boost in cash flow that new plant and equipment assets can provide.
Plant and equipment assets are easily removable or mechanical in nature. Some common plant and equipment assets include hot water systems, blinds and carpet. Each of these assets are depreciated across their individual effective life. An asset’s effective life determines how much you can claim each year. It’s important to keep this in mind as some assets can provide higher deductions sooner.
For example, carpet has an effective life of eight years and, when using the diminishing value method, a depreciation rate of 25 per cent. However, floating timber floorboards hold an effective life of 15 years and depreciate at a diminishing value rate of 13.33 per cent. This means you can claim back more sooner from carpet when compared to floating timber floorboards.
When choosing assets, consider the low-value pool and immediate deduction. The low-value pool allows assets valued at less than $1,000 to be depreciated at an accelerated rate. The immediate deduction can be applied to any eligible asset that costs up to $300 and is written off that financial year. You can read in more detail about the low-value pool and how to use it wisely here.
The assets you remove during a renovation can still boost your cash flow. A process called scrapping will let you claim any remaining value of removed assets as a complete deduction for the same financial year. This is in addition to the first-year depreciation deductions on the used assets.
A tax depreciation schedule must be completed before and after a renovation to make the owner eligible to scrap removed assets. It’s also important to be aware that if you live in the investment property during the renovation, any newly installed plant and equipment assets can’t be claimed. This is because they will be classed as previously used.