As part of your investment strategy, at some point you will have to decide if you should refurbish your property. This of course, will be a bigger issue for those who own second-hand property, because they will need more work than new build properties, and if you’re a landlord based overseas it will also be more difficult, simply because of the logistics. So is buy to let refurbishment worth it? In this article we cover the key points you need to consider before coming to your decision:
- What type of refurbishment work do you plan to do?
- How long will it take?
- What will it cost?
- What are your objectives?
- The three times when you should refurbish your buy to let property
- When buy to let refurbishment just isn’t worth it
What type of refurbishment do you plan to do?
In determining whether to undertake significant refurbishment works, you need to think about what you are expecting to take on and what your specific motivations are to do so.
Refurbishment works can be categorised into three broad categories:
- Cosmetic Refurbishment
This is likely to take 2 – 4 weeks depending on the size of the property.
This will include ‘basic handyman’ work. It would not include any major alterations and will simply include maintenance and tidying up.
Cosmetic refurbishment is the basic upkeep or your property such as re-painting, new flooring and replacing or tidying up blinds and curtains.
2. Light Refurbishment
This is likely to take 4 weeks to 3 months depending on the size of the property.
This will include the works you need to undertake in a cosmetic refurbishment and will also include minor upgrade works such as replacing bathrooms and kitchens.
3. Full Refurbishment
This could take up to 6 months depending on the works carried out.
The difference between a light refurbishment and a full refurbishment is that a full refurbishment could include structural alterations to the property. It could include upgrading and replacing plumbing and wiring together with alternations to the building itself. In many situations this work will require permissions from the building freeholder or the local authority.
What are the costs of refurbishment?
You will need to consider the following:
It is likely to take far longer than you think to undertake refurbishment works and clearly the more complicated the work, the longer it will take. It is not just the time taken to undertake the work, it will also include the time you need to plan and organise the work. If you are an offshore investor, anything other than cosmetic refurbishment works will be difficult to arrange and oversee, unless you pay someone do to this for you.
Even with the most detailed budgeting, the chances are, it will cost far more than you expect to undertake. It is very rare that refurbishment works cost less than what was budgeted for. Even if you have a significant contingency the reality is, you will more than likely spend more than you think.
Additionally, with more complex refurbishment works, other things will come up which you had not planned for. Very often, matters which need attention will not be uncovered until you begin works.
Why are you refurbishing your property? What are your objectives?
Investors usually undertake refurbishment works for one of three reasons:
- To improve the rental of your buy to let property and therefore improve the rental yield.
- To make the property more attractive to potential tenants, thereby reducing the chance of a void or keeping the length of the void to a minimum
- To improve the potential capital value of the property – particularly useful if you are looking to bolster the value of your investment property prior to a re-mortgage or sale.
You will need to make your own decision as to whether or not to refurbish your property. However, in our view, there are only three times when you should consider refurbishment work.
- Cosmetic refurbishment
If you undertake this type of work every 5 – 7 years you will ultimately reduce your maintenance costs, as you won’t have constant issues which arise and it can be a far cheaper way of dealing with these costs
2. Light or full refurbishment
If you have a plan to hold the property for a long period of time and you have the ability to recover this cost through tax relief.
3. Selling or Refinancing
If you are selling or refinancing the property and it will significantly increase the amount you can borrow or sell the property for. If you are selling you can offset it against tax costs.
When buy to let refurbishment is not worth it
It’s important to recognise, that undertaking significant refurbishment works if your sole objecting is to enhance the rental return from your property, it will not make financial sense to do so in most scenarios
Let’s look at a scenario to see how it could work in practice:
- Your property is worth £400,000.
- Your rental is £1,500 per month.
- Light refurbishment works, including new kitchen, bathroom, repainting and new carpets cost £15,000.
- Works takes 6 weeks, meaning £2,076 in lost rental income
Total cost of £17,076
Following the work, lets assume the rent increases by 20% (which would be a huge increase) and you now achieve £1,800 per month.
It will take 57 months (nearly 5 years) to recover the cost of the refurbishment.
In the UK, you’ll need to pay additional income tax on the increase in rental, so the return on a net basis will be event lower and the costs will take even longer to recover!
So, as you can see, unless you are looking to hold the property for a very long period it is simply not financially worthwhile refurbishing the property.
We hope you have found this article useful, feel free to comment or ask any questions. For more information on about overseas property investment check out our other articles and request your copy of our Buyers Guides from [email protected]
We’ve produced articles specific to overseas investment property in the UK, Australia and New Zealand, so make sure you take the time to consider all your options and make sure your investment is right for you.
Important notice: Proptech Pioneer and its associated companies seeks to provide investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, conveyance, lawyer, financial advisor or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision