The decision by the big banks to increase interest rates for property investors by as much as 0.28% during the last month will put pressure on the cash flow and rental returns of property investors throughout Australia moving forward.

This follows the out of cycle interest rate increases imposed on property investors by the big banks last year.  

Therefore, one of the biggest challenges for property investors in Australia over the coming year will be to boost rental returns in a climate of rising interest rates.

Many property investors in Australia are now borrowing large amounts of money in the belief that they can substantially boost their rental returns.

For example, a number of first time investors are spending more than $50,000 on home renovations even though it will take the many years to recover the money in rental income.

Some property investors are adding new bedrooms to their properties even though many surveys say that this is one area of homes that are under-utilised because families are getting smaller.

If a property has an average rent of around $400.00 per week, it would take an investor many years to recover $50,000.00 in expenditure on home renovations even if they increased the rent by an additional $100.00 per week.

In addition, landlords should also take into account that if they increase their weekly rents by a very large amount to cover their home renovations, they may incur a higher vacancy rate because it may take longer to find a suitable tenant with a much higher rent.

Landlords who expect a massive increase in rental returns following home renovations may therefore be disappointed especially if they spend a large amount of money on renovations.

Instead of focusing on major renovations to a property, investors should take a more targeted approach and concentrate on important areas that require limited expenditure.

Presentation is an important issue for prospective tenants and areas such as internal paint, floor coverings and window treatments are very important.

Even better quality light fittings can improve the overall presentation of a home.  A few hundred dollars spent on garden care, for example, can also make the property much more attractive to tenants.

With a limited budget of $5,000.00, a new landlord can substantially improve the presentation of the home and quickly lease their property.

The purpose of targeted renovations is to ensure that the property appeals to as many prospective tenants as possible. It is important to remember that your investment property is competing against other investment properties in the local area for tenants and the weekly rent as well as the presentation of the property will determine the quality and quantity of tenants who will want to live in the property.

Targeted renovations of this kind will also reduce the vacancy rate by allowing the landlord to choose from a wider selection of tenants providing the rents remain competitive.

See also:

How to be a good landlord

Gardens add value

Why landlords need insurance