KEY POINTS:
Property investors are coming under increasing financial stress. Rental yields have dropped 35 per cent in the past three years and, at the same time, floating mortgage rates have risen nearly three per cent.
Looking for ways to squeeze more profit out of an investment should become a
contact sport for investors.
The easiest way to increase rental yield is to put up the rent. Tenants expect annual rent increases and, when they don't happen, they think they're getting a bonus. Beyond that, investors need to find creative ways to squeeze more from tenants. This means anything from moving walls to create rooms, to adding legal sleepouts, or installing mod-cons such as a heat pump, dishwasher or Sky and charging an extra $10 or $20 a week.
Stuart Shutt, director of Investor Homes which builds investment properties, and himself an investor and renovator for 12 years, favours adding rooms - where walls don't need to be moved - and building minor dwellings in back gardens that can be let separately.
He cites the example of a Howick property that had a lounge "big enough to play cricket in". Shutt simply split the room in two by adding a wall, which cost $1000. The extra bedroom boosted the rent by $100 a week, amounting to more than $5000 in the first year.
Building a minor dwelling, says Shutt, can boost yield enormously. They cost around $150,000 to build but mean the investor ends up with two rental houses on a property. They're ideal for properties that can't legally be subdivided.
One recent example was a West Auckland property the investor bought for $300,000 and could have rented for $330 a week after a minor touch-up.
The minor dwelling, which Shutt built, pushed the capital value of the property to $450,000 and the rent to $660 a week, increasing the gross rental yield from 5.72 per cent to 7.63 per cent, a healthy improvement - albeit still not positively geared.
Shutt warns investors not to be too ambitious with renovations.
Often cosmetic changes are better value for money than major works, he says. Some investors are so highly geared that they can't afford even $1000 to add a wall or a fence.
Property investor and Barfoot & Thompson Remuera branch manager Jeff Cate says a second bathroom is becoming increasingly important for tenants - especially those living in group situations. "Suburban bathrooms are as valuable as carparks are in the city."
Shutt says that - providing walls don't need to be moved - a second bathroom will cost around $10,000 and add about $20 a week to the rent, and a kitchen suitable for a rental property costs as little as $15,000.
Anyone looking for simple ideas to increase the rent and, consequently, the rental yield on their property could start by picking up a copy of the book, Massive Profits in Real Estate by Adding Value & Renovations, by Phil Jones and Ron Hoy Fong. The book lists 1324 ways to increase profits in real estate, including simple makeovers.
Hoy Fong, who is on the Auckland Property Investors' Association board, says in lower socio-economic areas he increases rent by improving security such as turning carports into lock-up garages. He will also add a cheap or second-hand microwave, TV and fridge to the property and charge $20 a week extra.
In student flats - especially those aimed at the Asian market - Hoy Fong buys beds, tables and other basic furniture second hand and is able to charge $30 to $40 a week more.
Middle-class rental homes, he says, benefit from better presentation. One of his favourite additions is simple disk lights that can be bought for $10 each but look upmarket.
It is much easier to up the rent when tenants are replaced. Existing tenants, wouldn't be willing to have their rent raised because you'd power-washed the house. But this and a quick spruce up of the garden could enable a landlord to get $10 extra a week from the next tenant.
In between tenants or when an investor buys a new property, says Shutt, it can make good sense to spruce up the outside with works such as replacing rickety fences and ripping out trees and old plant beds in favour of new lawn.
These works will pay for themselves over time with increased rent and rentability, minimising the downtime between tenants which also hits yields.
Ways to boost your rental yield
* Add extra rooms.
* Build a sleepout.
* Provide Sky TV.
* Add another bathroom.
* Give the property a spruce-up.
* Diana Clement is an Auckland-based personal finance and investment writer