Often the return on a rental property can be improved by utilising what is already available, rather than trying to buy another rental property.
Big Section
If one of your rental properties has a large section, you could look at subdividing or adding a minor dwelling.
Minor Dwelling:
This utilises the rental property land that is already available without subdividing, so two dwellings are on the one section:
The two houses and section must be sold together.
Cost approximately $130,000 once all services and costs are included.
In Hamilton these minor dwellings can achieve around $300 per week or $15,000 per year. As the land is already there, this gives an 11.5% return on the cost of $130,000. So currently this will easily pay for interest, extra rates, insurance and some repairs. My figures at 6% interest and 100% borrowed would give a $4,000 cash surplus per year which could help with the overall property’s cash flow.
You also need to consider whether you will lose any rent from the existing house because of the section size being reduced.
Subdividing:
This process can be costly and time consuming. It creates a separate section that could either be sold or built upon.
Costs are normally at least $50,000 and can be a lot higher if the subdivision is complicated, has entrance issues or earthworks are required.
The value of two houses, on two separate subdivided sections can be quite a lot higher than a house and minor dwelling on the one section, because the subdivided sections/houses can be sold separately.
If you can build a new house for $200,000, and the subdivision cost is $50,000, then the total cost is $250,000. You could then get $375 per week, that is $18,750 per year, based on 50 weeks and a gross yield of 7.5%. With interest rates currently being low, this would provide a slight cash surplus, but as interest rates rise to normal levels of around 7.5%, then the property would still be negatively geared, with the owner having to introduce funds to pay other costs like rates and insurance.
Sleep Out
Does your property have a large garage? Some investors have managed to convert large garages into a bedroom with ensuite. The costs can vary widely depending on the work required, but some of our clients have managed to do the renovations for around $50,000. They are then getting at least a $150 per week extra, or $7,500 extra rent per year based on 50 weeks. This is a gross yield of 15% which is fantastic!
Extra Bedrooms
Most rental properties income can be broken down per bedroom, and they effectively get so much per bedroom. If you have extra bedrooms, then you can normally get more rent. Is it possible to convert an existing large room into two small rooms? Convert an extra living space into a bedroom? Convert an internal garage into a bedroom?
These conversions often do not cost a lot and might be under $10,000. A rental return for a bedroom will depend on the area but could easily be $100 per week. This would give $5,000 per year additional income based on 50 weeks, or a 50% gross yield. Another way of looking at this return and cost is that the renovation would pay for itself in around 2 years, which is a great return on the investment.
Adding extra features
You could offer extra features like a dishwasher or heat pump, or even a garage/carport to entice tenants and to improve rent.
Extra features, especially heat pumps, normally give an increased rental. As an investor you need to compare the cost with the return. Ideally you would want the cost repaid in 2-5 years depending on the life of the asset.
Hopefully these items will give you some ideas to maximise what you already have, and to improve your overall return from your rental property.