How to lift yield on your rental property
According to recent data released, the average gross rental yield in Auckland is hovering just below 5% - although in my recent experience, even this is hard to find. The same data suggests most of the rest of NZ (on average) is just above 5%. Of course there are a few areas getting more than these numbers but let’s work on the averages for now – it’s easier to talk to.
With the Reserve Bank LVR changes (and generally below par rental yields) now is the time for investors to be looking at ways to maximise their existing portfolio and increasing its return where buying more properties is not an option. As the old saying goes, we need to “spend money to make money”.
A great example of where this has worked well is with a client of ours, James G from Ronovationz property group. At Christmas last year James purchased a house in Forrest hill, North Shore for $630,000 (CV $570,000). The property was in a run down condition ready for a full renovation. After an "extreme makeover" renovation (see below images) which cost $63,000 and included adding a third room, the property was revalued at $860,000 in Feb/16 which translates into a net equity increase of $167,000 for two months’ work. Not bad! More than that though, it took the expected rent from $450 per week up to $620 per week which increased the yield from 3.6% to 4.3% (based on purchase price plus costs).
Not out of this world numbers, but a simple way to increase return in a highly sought after area. Looking for ways to add income sources is an effective way of increasing both property value and yield. Most successful investors will have multi-income properties with 2-3 incomes per property. If possible, a minor dwelling or converted garage will give the ability to add a second tenant and significantly increase the overall yield. There are plenty of options out there that will ensure these options don’t force you to over capitalize. With changes to the unitary plan, you could have more options than you think.
While James was able to add a bedroom without too much hassle, this isn’t always possible, so a simple cosmetic renovation can do the trick and bring in tenants who are willing to pay a bit more. Invest in the areas of the property that will attract tenants. Simple upgrades to the kitchen and bathrooms can bring life to a dated property, but these areas can also be where investors over spend. Whilst matt black tap wear is the in thing right now, it’s an unnecessary expense that looks great brand new, but will need replacing the minute the tenants move out – if not before. Completing these renovations could also be a great way to lift the value and get you back in buying mode after the LVR restrictions halted your growth.
If you’re already sitting over 60% then there are affordable options such as Squirrel Money. You can borrow up to $70k on the house with as little as 10% equity. That should help to complete the renovations. From there, you can hold and enjoy your new increased yield, or leverage to buy again. Either way, at least you’re moving forward.