One of the advantages of investing in property is that you can make improvements to enhance its value and consequently your personal wealth. A disadvantage is that dwellings require ongoing maintenance, and this expense reduces an investment property’s cash flow.
Minimising or avoiding maintenance costs is often a false economy. Maintenance cannot be avoided, only deferred. Problems either remain unresolved or they get worse. Either way, you will have to complete the maintenance at some stage or accept a lower (eventual) sale price, as most potential purchasers will factor in these costs.
How much should you spend on maintenance and improvements?
As a general rule-of-thumb, it is a reasonable expectation to spend circa 0.40% to 0.75% p.a. of a property’s value on ongoing maintenance. You may not need to spend that each year, but over a 10-year period, that would not be an unrealistic expectation. Houses tend to require more maintenance than apartments.
Items that increase rental income
It is important to ensure that your property is in good tenantable order so that its comparable to other properties in the surrounding area. Also, it is wise to look for items that will enhance or maximise its rental income. Such items tend to include:
- Air conditioning, particularly in apartments, is highly desirable and can often increase your weekly rental income by up to $20. That is a pretty good return on investment considering a split system cost around $3k to $4k to install.
- New carpets.
- Re-grouting tiles in kitchens and bathrooms. Not only is this good preventative maintenance, but it can have a positive impact on a property’s appeal.
- Sprucing up bathrooms and kitchens. It is advisable to maintain both the kitchen and bathroom to the same standard, otherwise it looks a bit odd. These projects can be completed cost-effectively by replacing the flooring (e.g. new vinyl), painting cupboard doors and replacing handles, replacing benchtops, appliances, tapware and so on. Avoid full kitchen refits where possible.
The standard of any maintenance and improvements must be in-keeping with the area and in line with tenant expectations.
Items that increase the value of a property
Completing maintenance typically preserves a property’s relative value. However, completing improvements often increases a property’s value, although its typically a once-only improvement.
Some examples of improvements include renovating kitchens and bathrooms, improving natural light (e.g. through painting, installing skylights, etc.), adding a bedroom (for houses). These enhancements can improve a property’s value by more than their cost.
Non-cosmetic expenses such as rewiring, reroofing, plumbing and so on tend to have little to no impact on value, but sometimes they are unavoidable.
Don’t go overboard
You cannot expect a tenant to take good care of your property if you don’t. Therefore, it is important to maintain your property to a good standard, commensurate with tenant and potential purchaser expectations, so that you attract quality tenants.
However, improving a property is a financial decision, not an emotional one. You don’t need to put in marble kitchen benchtops and European appliances. It must be durable and attractive whilst also being cost-effective and good value for money.
Apartments: common areas and facade
If you own an apartment, you will know that the Owners’ Corporation is responsible for maintaining common areas and the building.
It is important that these are adequately maintained to improve street-appeal, security and structural integrity. Also, where possible, an Owners’ Corporation should seek to improve amenities so that they are comparable to contemporary apartments e.g. installing video intercoms for additional security, renovating stairwells to make them more inviting, resurfacing driveways and so on.
Tax treatment of maintenance
The cost of repairs and maintenance are generally tax-deductible in the year they were incurred. However, some expenses are of a capital nature and must be depreciated over their useful life (see table 3 beginning on page 39 in this ATO guide) including:
- Replacement of an entire structure or unit of property such as rebuilding a fence, replacing a stove; and/or
- Improving an item beyond its original condition, renovations, extensions and alterations; and/or
- Initial repairs after acquiring the property.
Your registered tax agent can advise on these matters.
It’s an investment, not an expense
Undertaking such improvements are often positive from a cash flow perspective.
For example, if installing a split system air conditioner costs $4,000 and improves your rental income by $10 per week, I estimate you will be better off by $324 p.a. after tax:
|Additional income after tax||$276 ($10 p/week less 47% for tax)|
|Plus tax saving (from depreciation deduction)||$188 ($4,000 over 10 years @ 47%)|
|Less interest costs||$140 ($4,000 @ 3.5% p.a.)|
|Net benefit after tax||$324|
This isn’t going to change your life, but at least it’s not impairing your cash flow and its likely enhanced the value of your property. Overall, it’s an astute investment, not an expense.
How to fund maintenance costs
Where possible, it is always advantageous to fund all major maintenance and renovation projects via additional borrowings. Even if you have sufficient cash savings, you are better off to increase your borrowings and retain your cash savings in a linked offset. This doesn’t cost you more interest, but the benefit is that you maximise your future tax deductible loan.
The simplest way to provide for any future known and unknown expenses is to include buffers into loans. For example, when a client purchases an investment property, we always add a buffer of $20k to $50k into the loan, which they can draw on whenever required.
How do you arrange it?
Your property manager can arrange competitive quotes to undertake minor repairs and improvements such as installing a split system.
However, for larger projects such as kitchen and bathroom renovations, it is best to outsource these to businesses that specialise in completing these projects as they maintain relationships with various trusted tradies.
When to minimise maintenance costs
If you have a house that is very rundown, it is likely that any potential purchaser will bulldoze the dwelling and rebuild. In this circumstance, given your property is predominantly land value, it would be wasteful to spend a lot of money on maintenance and improvements. As such, the best approach is to spend as little as possible whilst doing enough to keep it in a tenantable condition.
You’ve got to give to receive
Looking after your property and looking for ways to enhance its value and appeal will serve you well in the long run. It will help minimise vacancy, maximise rental income and enhance its capital growth prospects. Property maintenance and improvements are an important ingredient to successfully build wealth through property investing.
Acknowledgment: Thanks to Jordan Telfer from Wakelin Property Advisory for his input into this blog.