Hi guys,
I have been agonising over this for weeks now so would really appreciate some thoughts from people who actually have experience with the value and costs of renovations/refurbishments...
I have a 30sqm studio in circular quay that is currently rented out on a short-term basis (like a serviced apartment, but I can cancel the contract with a month's notice and rent it out long-term or owner occupied instead if I like).
It is currently providing a net yield (ie net of all outgoings aside from interest) of 6.91% pa, as well as a decent amount of capital growth to date, so I am fairly happy with it so far.
However, the property manager has been contacting me, offering to refurbish it, as they have done with several 1brm and 2brm apartments, in order to start leasing it out as a "deluxe" apartment on the website at a higher nightly rental rate.
This seems to have some advantages in that I would be the first studio to be refurbished in the building, which would differentiate me on the online booking site from the 5-6 other studios rented out on a short-term basis - both in terms of a higher nightly rental rate and in terms of possibly less competition for tenants.
However, this is also a risk as being "first cab off the rank" could prove that either it is a failure and rent does not increase at all as any higher rent prices the apartment out of the market, or it is successful but it prompts the other studios in the building to follow suit, thereby nullifying the competitive advantage.
Secondly, the actual cost relative to work done seems excessive to me, so I don't see how the capital value would increase by more than the outlay.
The original email from the property manager estimated the cost at $13,250 and seemed to be all inclusive, but now that the lead developer has gotten back to me with a cost spreadsheet, this cost has increased to $18,000 and does not include any new kitchen appliances/new bed/new washing machine and could apparrantly be completed in a week (cost spreadsheet attached).
The furniture that is being included also seems to be at RRP, as a quick google search can find me, for example, a Le Corbusier arm-chair for about $70 less than the quoted price here, including delivery, so I really question the value of this overall. There seems to be an implicit conflict of interest in having the consultancy & project management be based on a percentage of furniture costs as well... However, if it increased rent by ~$20 per night, with an 80% tenancy rate, less AEA's 33% commission, that would be $13.34 * .8 * 365 = $3912.80 pa / $18,000 = 21.74% net yield on investment, which seems great. I just can't work out whether it is worth the risk and how likely it is that it would maintain the same tenancy rate with a higher nightly rental rate, just for having new paint, new carpet, new kitchen tiling and "decking out" the living room a bit, but I have no idea about refurbishments...
My final concern is how the cost would be treated for tax purposes - Can someone please confirm my thought that any yet to be depreciated amounts would be tax deductible this year (the year they are replaced) and the ~$18k refurbishment cost would be depreciated at 2.5% or 4% per year from then on?
Building Website:
http://aeahotels.com/city/index.html
Booking site:
http://book.resonline.com.au/make-booking?ap=265630
Development proposal:
http://www.theuntitledpartnership.com/bridgeport/
Really curious to see what some of you would do in this situation?
I have been agonising over this for weeks now so would really appreciate some thoughts from people who actually have experience with the value and costs of renovations/refurbishments...
I have a 30sqm studio in circular quay that is currently rented out on a short-term basis (like a serviced apartment, but I can cancel the contract with a month's notice and rent it out long-term or owner occupied instead if I like).
It is currently providing a net yield (ie net of all outgoings aside from interest) of 6.91% pa, as well as a decent amount of capital growth to date, so I am fairly happy with it so far.
However, the property manager has been contacting me, offering to refurbish it, as they have done with several 1brm and 2brm apartments, in order to start leasing it out as a "deluxe" apartment on the website at a higher nightly rental rate.
This seems to have some advantages in that I would be the first studio to be refurbished in the building, which would differentiate me on the online booking site from the 5-6 other studios rented out on a short-term basis - both in terms of a higher nightly rental rate and in terms of possibly less competition for tenants.
However, this is also a risk as being "first cab off the rank" could prove that either it is a failure and rent does not increase at all as any higher rent prices the apartment out of the market, or it is successful but it prompts the other studios in the building to follow suit, thereby nullifying the competitive advantage.
Secondly, the actual cost relative to work done seems excessive to me, so I don't see how the capital value would increase by more than the outlay.
The original email from the property manager estimated the cost at $13,250 and seemed to be all inclusive, but now that the lead developer has gotten back to me with a cost spreadsheet, this cost has increased to $18,000 and does not include any new kitchen appliances/new bed/new washing machine and could apparrantly be completed in a week (cost spreadsheet attached).
The furniture that is being included also seems to be at RRP, as a quick google search can find me, for example, a Le Corbusier arm-chair for about $70 less than the quoted price here, including delivery, so I really question the value of this overall. There seems to be an implicit conflict of interest in having the consultancy & project management be based on a percentage of furniture costs as well... However, if it increased rent by ~$20 per night, with an 80% tenancy rate, less AEA's 33% commission, that would be $13.34 * .8 * 365 = $3912.80 pa / $18,000 = 21.74% net yield on investment, which seems great. I just can't work out whether it is worth the risk and how likely it is that it would maintain the same tenancy rate with a higher nightly rental rate, just for having new paint, new carpet, new kitchen tiling and "decking out" the living room a bit, but I have no idea about refurbishments...
My final concern is how the cost would be treated for tax purposes - Can someone please confirm my thought that any yet to be depreciated amounts would be tax deductible this year (the year they are replaced) and the ~$18k refurbishment cost would be depreciated at 2.5% or 4% per year from then on?
Building Website:
http://aeahotels.com/city/index.html
Booking site:
http://book.resonline.com.au/make-booking?ap=265630
Development proposal:
http://www.theuntitledpartnership.com/bridgeport/
Really curious to see what some of you would do in this situation?
