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Refurbishment: the surefire way for landlords to increase the value of a rental property

by | Jun 13, 2016 | Advice, Clients

This article by Karl Griggs originally appeared in Landlord News.

As the weather gets warmer, many peoples’ minds turn to spring-cleaning and property improvement. This is also true of landlords, both those with properties they think could benefit from some work and those looking to buy a refurbishment project. Sprucing up a property is a classic way for landlords to be able to improve the tenant profile occupying the space and generate more rental income from that property.

With any refurbishment project, a healthy dose of realism is key. There is a limit to how much value it is possible to add to a property with refurbishment work. Despite careful planning, it is not possible to predict property values and how the rental market will move in the future. If you are buying a property it is generally better to purchase below market price and stick to a sensible business plan rather than get carried away by unnecessary add-ons to the property, which may not add to the value of it, and may not be appreciated by tenants.

Quick ways to increase rental yield

For landlords, in addition to increasing the value of the property, refurbishment will cut down on long term maintenance and attract higher quality tenants, who often stay for a longer period. Most tenants want to feel that they’re living in a modern, convenient property. Low-cost updates like repainting in a bright modern colour and updating amenities such as taps, door knobs etc., can change the feel of a property. Equally, putting the latest appliances will make tenants feel the property is more desirable.

Refurbishment vs repair

Landlords of unfurnished, part furnished and furnished properties should be aware that the ‘automatic wear and tear allowance’ has been removed. The ‘standard’ 10% allowance for wear and tear has been replaced with relief on actual money spent on replacing furnishings and appliances. This measure came into effect for expenditure incurred on or after 1st April for corporation tax payers and 6th April for income tax payers. However, as this is intended to enable landlords to maintain a property in its existing condition, through replacing furniture, landlords cannot claim for refurbishments and improvements.

Refurbishment property finance

If a landlord does not have the ready cash to work on a property, or to buy a property in need of work, finance is available. Specific refurbishment finance is not something that high street lenders generally provide. Most of them will only offer a mortgage on a property that is already considered habitable. Instead, more specialist lenders will be able to provide specific refurbishment finance or short-term finance. The interest rates offered will depend on the landlord’s level of experience and the level of complexity of the project.

For property investors who need finance quickly, an advantageous kind of finance available for all kinds of refurbishment is short term loans, giving investors the benefit of being able to raise finance quickly to do the works, increase the value and then redeem or change to a buy-to-let mortgage, normally without early redemption charge.

For those looking for a short term refurbishment loan, there are two kinds of refurbishment. Landlords who are looking to do minimal works on a property will need ‘light refurbishment’ finance. This is classed as work that costs less than 15% of the property value. These include cosmetic improvements to a property and smaller works such as rewiring, repainting or installing a new bathroom.

Heavy refurbishment work on the other hand constitutes major structural work, costing more than 15% of the property value. This could need planning permission or involve certain building regulations.
However, both kinds of loans are intended for experienced landlords and lenders will expect to see an exit plan in place, either how you intend to pay off the loan within the necessary timeframe or how you expect to move onto a longer term mortgage. You should consult a broker to find out about your finance options.

An alternative can be using your own home to raise the finance through a secured loan, also known as a second charge mortgage. At CPC Finance we have had clients raise a short-term loan to buy a property and then use secured loans for the works. If you have a mortgage on your home but you want to use it to raise finance, a secured loan can be a better option than remortgaging. Secured loans sit behind the existing mortgage, meaning no exit fees.

A new refurbishment project

Refurbishment can be very capital intensive and for a new project you will need to have a thorough plan in place first, both for your own peace of mind, and if you need finance, to reassure lenders you know what you are doing. This can include working out the costs of the property, choosing your target tenant market and determining realistically how much you will get from selling or renting the property. This will help you work out your profit margin and if the endeavour is worthwhile. Other local property investors can be a good source of insight on local rental and prices.

As refurbishment can be a considerable cost, buying the property at the right price is key. Auctions can be a great place to pick up a property below market value. Our guide to buying property at auction can help you approach the auction in the right way.

Fulfilling the potential of a property through refurbishment can be a powerful way for landlords to maximise the return on an investment. However, they are not to be underestimated and should be planned carefully to ensure that they are a success.

Karl Griggs, Director, CPC Finance