Learn How Good Renovation Will Change Your Returns

Updated: Dec 4, 2019

Back when I was an active AirBnB host and running seminars on it, there was one question I got asked very frequently - "How can I increase my bookings?"

I would reply with another question; "can I see photos of your property?"

The number of times I was shown properties with a hodgepodge collection of furniture grouped together in tasteless format was insanely high. I would politely remind them of a key point in my seminar - that your property must be beautiful and aesthetically pleasing as a first step.

Beautiful is profitable.

If you've read my book, The Ultimate Guide to Buying Property, and my post on how to furnish your apartment for long-term and short-term tenants, you'll know that good renovations are very important for the acquisition of tenants. It is the basic tenet of successful land-lording.

I know what you're thinking now... Is it worth spending good money on renovations?

This post, with a caveat, will provide you with some examples and empirical evidence in favour of beautiful renovations.

To evaluate your returns, among other things, you must observe the following:

  1. Rental price

  2. Maintenance

  3. Vacancy Periods

The combination of higher rental price, reduced maintenance costs, and low vacancy periods can greatly boost your net returns. I call this your rental performance.

Good Renovation, Better Rental Performance

In early 2015, I asked 2 clients I had sold properties to near the KLCC area if they would allow me to manage their properties on AirBnB. Both properties, let's call them Property A and Property B, were identical with one difference - the renovation.

Property A was renovated and furnished in good taste. Renovations for this property cost about RM100,000.

Property B was furnished in DIY style with some second hand items. An estimated RM12,000 was spent on it. It was not very tasteful.

In the first 2 years, Property A averaged approximately 200% higher income on AirBnB. The net income after deducting renovation costs for Property A was 10% higher.

There were many reasons for this. The most obvious is that Property A could command a higher premium and it would naturally have more occupancy. Less obvious is the fact that Property B had higher operating costs.

The quality of tenants it kept attracting were of a lesser quality and therefore wear and tear was significant. This aggravated the fact that most of the furnishing were of low quality. The 2nd hand washing machine kept giving problems and eventually had to be replaced with a new washing machine. The dining chairs started coming apart by the end of the 2nd year.

By the end of the 2nd year, Property B required more maintenance as reviews were not so great. It had to be painted again, provided with new curtains, and required fixes.

Property A, never had these problems. Everything worked well beyond the 2 years. When I ceased AirBnB operations 4 years later, there were negligible maintenance costs and I was able to find a tenant almost immediately at RM500 above average market rates.

Property A commanded better rental price, attracted a better set of tenants, required lesser maintenance, and had lower vacancy periods. In short, over the long-term Property A had superior rental performance over Property B.

You may be saying, well, that's for short-term accommodation, it's different for long-term tenancies.

You're right. Partially at least.

The difference between outstanding and mediocre could command a high premium in AirBnB. Especially back in 2015 when AirBnB in Malaysia was less of a crowded space.

However, in the long-term rental market good renovations don't always command a corresponding premium. For example, if the market average is RM2,500 per month, you'll find it extremely difficult to charge RM5,000.

You therefore need to carefully strike a balance between the right amount of renovation and the potential payback. This is not an exact science but with some effort and a willingness to diligently measure your results, you can find that sweet spot.

Let's look at an example shall we?

The Mathematics of Renovations

To be clear, the term "renovation" in this post is used to represent any beautification work on your property including furnishing and fittings.

Let's assume that Jack and Jill each bought identical apartments. For clarity, these are the details of the apartments:

  • Purchase price: RM800,000

  • Size: 1,000sf, 3 bedrooms and 2 baths

  • Mortgage value: 90%

  • Monthly building service fee and sinking fund: RM440

  • All cost elements (except the vacancy and annual repairs) like MLTA, Indah Water, Assesment and Quit Rent are the same.

Jack spends RM30,000 on renovations and his property looks ordinary. It has enough to meet the basic expectations of the average tenant. He's able to rent his property for RM2,600 per month.

He spends RM2,900 on annual improvements and RM700 on repairs every year.

Over the next 8 years, his vacancy averages 1.5 months every year.

Jill on the other hand spends RM50,000 on renovating her property. She ensures that her property looks amazing. Most tenants who view the property are impressed immediately. She's able to rent her property for RM2,900.

Jill also spends slightly less on annual improvements (due to better wear and tear resistance from higher quality fittings) which amount to RM2,700 and her repair cost is the same.

Over the next 8 years, Jill's vacancy averages 2 weeks every year.

In this scenario, Jill makes RM6,000 more than Jack every year. In just over 3 years, her renovation cost has been covered.

When both of them sell their properties for the same price (assuming a 5% annual appreciation) at the end of 8 years, Jill earns nearly RM30,000 more.

The math here clearly demonstrates that if your spend on renovations can help make your property command better rent and reduce vacancy, you are better off spending that money.

(All the calculations for this example were made using my property investment calculator that comes free with my downloadable book.)

How Much Should You Spend on Renovations?

This is a hard question to answer and there's no one-size-fits-all answer.

Remember the metrics that make up rental performance? Here it is again:

  1. Rental price

  2. Maintenance

  3. Vacancy Periods

How much you can move the needle on each of these metrics with every additional ringgit spent on renovations will determine how much you should spend.

Let me illustrate. In the example above, if Jill spent RM100,000 on renovations but could only increase her rent to RM3,000 because no one in the market was willing to pay RM4,000, she would be worse of in the short term. The additional RM50,000 spent to make her property look amazing was not going to pay in returns.

It also depends which market you're catering for. If your tenants are rich corporate clients, you can have greater variance in rent. The expatriate CEO of a multinational corporation would be willing to pay an additional RM10,000 in rent for a house that exuberates the wow factor.

The average Malaysian on the other hand may be reluctant to spend more than 15% above the average on rent. The good news is that this can be your starting point.

How you ask? Let me illustrate.

In the example with Jack and Jill above, let's say that the average market rental rate is RM2,600. Jill optimised her renovation cost by first asking this all important question - what do I need to do to justify RM2,990 per month in rent?

She looked at similar listings on iproperty that were charging upwards of RM2,990 and studied the cost for making her property look better. She determined what items would give the biggest bang for her money. She determined a well equipped kitchen, good beds and mattresses, and 50" LCD TV with a good AV system would appeal to her ideal tenant.

She then worked towards a look that would impress. Something that would make her ideal tenant want to live in her property. This would greatly reduce her vacancy periods.

With the property investment calculator that comes with my downloadable book, she then ran some simulations.

She knew for RM30,000 she could make her property look like Jack's and what the rental price would be. She also queried to find out what the average waiting period was for a new tenant. She estimated it at 1.5 months.

By increasing the rent, reducing the vacancy period and reducing the maintenance costs (by realistic amounts) she was able to play around with her renovation cost and determine that somewhere around RM50,000 was the sweet spot.

I mentioned earlier that this is not an exact science. How can you predict with accuracy the quantum by which you can reduce vacancy? This is difficult and you'll have to research your location, ask your real estate agents a lot of questions, speak to other investors in the area, and gauge occupancy using iproperty. Finally, you'll have to use a lot of common sense and rely on your gut.

You'll get better at it over time. I promise.

Tasteful Renovation Does Not Necessarily Mean More Expensive

My mum has a friend who has spent a lot of money on her bungalow. She's probably spent millions on her interior alone. I love this lady to bits. She's very pleasant and has the kindest of hearts.

Unfortunately, her house is a monstrosity. It's a disastrous collision of hip hop overstatement with French Baroque. The gaudiness can be overwhelming. I'm pretty sure it'll give the style police a headache.

I've seen this mishap many number of times. If it's your own house, it's yours to do as you please. But if you're looking for tenants, then you MUST understand your ideal tenant. What do they appreciate? What do they want? What's the style that they'd value?

Once you know this shop around. Speak to people you know who have done good renovations. Find out how much they spent and who their go to guys are.

Property investment is not a journey you should embark on alone. Network. Speak to other investors in your circle of friends. Malaysians are the most obsessed people about property in South East Asia. They rank 4th in the world on this. So you're bound to have friends who have been buying and investing in properties. Get recommendations from them.

I've seen people spend RM80,000 on renovations and others who get a better overall look with similar quality for RM50,000. My good friend Dr. Badrul gets amazing results at unbelievable costs. But he's been renovating his properties for 20 years now and has built a wealth of experience.

If you're in the business of being a landlord, then you must begin to familiarise yourself with renovations. You should have trusted contractors, interior designers, handymen, air conditioning experts, pest control specialists, washing machine repairmen, plumbers, gardeners, and any other service provider in this ecosystem.

As a an additional rule of thumb, ensure that your renovations are practical as well as beautiful and that your furnishing and fittings will last. If your tenant is a family with small children, then a white sofa or a flimsy standing lamp may not last. Look at your long-term maintenance costs when evaluating your renovations.

So Renovate for Better Returns. But Do It Wisely.

Renovating your property tastefully can greatly improve your rental performance. It can help boost your rental price, lower vacancy, and lower maintenance costs.

If you're having problems renting out your property, it may be time to evaluate how your property looks. I have plenty of my own examples on how improvements made a huge difference.

Most recently an old client of mine was trying to rent his property after his former tenant moved out. This property is in KLCC. The vacancy periods here can average 2 months or more.

After 2 weeks of the property being on the market, I visited it. My immediate recommendation was to have the property thoroughly cleaned with some repair and refurbishment works. Some areas needed a new coat of paint and I wanted everything looking nice. We spent about RM700.

The property was rented out 10 days after that.

This example demonstrates that you don't have to spend too much to impress. However, you don't want to spend too little and have a shoddy look as well. It is paramount that you balance how much you spend on renovations with the resulting benefit. With my property investment calculator, some common sense, and experience, you'll get really good at this sooner than later.

184 views2 comments

Recent Posts

See All