Why “Cheap-Cheap” Investment Property Renovations Don’t Work!!

Managing costs and spending wisely during a renovation of an investment property is key to maximizing yield. The vast majority of landlords in Hong Kong use the cheapest possible materials and finishes when renovating. This “cheap-cheap” mentality, ingrained in the culture means the renovations rarely last more than or couple of years, or even worse, look dreadful from the start, which kills the yield from the get-go!   Trust me, tenants do notice!!!

The cold hard truth is that an extra 15-25% spend on a renovation up front, will pay for itself within the first 2-4 years and will generate a vastly higher yield over the life investment. To illustrate this, please consider the 2 real world examples Architectural Interiors have renovated and now manage for investor clients: (SCROLL DOWN FOR SOME PHTOTOS AT THE END)

Sheung Wan (360sqft net) Queens Road Central (395sqft net + Terrace)
  No Renovation Cheap Renovation Good Renovation No Renovation Cheap Renovation Good Renovation
Purchase price HKD 6,800,000 HKD 6,800,000 HKD 6,800,000 HKD 5,300,000 HKD 5,300,000 HKD 5,300,000
Renovation cost HKD 0 HKD 160,000 HKD 205,000 HKD 0 HKD 250,000 HKD 300,000
Rent HKD 17,500 HKD 23,000 HKD 25,500 HKD 22,000 HKD 27,000 HKD 30,000
Gross Yield (after renovation cost) 3.09% 4.06% 4.50% 4.98% 6.11% 6.79%
Renovation paid off N/A 29.1 Months 25.6 Months N/A 26.3 Months 24 Months
Gross Monthly Income HKD 2,112 HKD 7,612 HKD 10,112 HKD 6,612 HKD 11,612 HKD 14,612
Gross Profit after 10 years from income only (excluding gains in Asset value) HKD 253,440 HKD 753,440 HKD 1,008,440 HKD 1,200,720 HKD 2,990,000 HKD 3,300,000
Additional profit with renovation N/A 197.29% 297.90% N/A 29.15% 54.97%

1. excluding maintenance costs, taxes and agents fees and assumes rented full time for 10 years, excluding Asset price inflation also!
2. Assumes a mortgage costs of HKD 11,994 (LTV 60% at 3.1% APR)
3. Assumes a mortgage costs of HKD 15,388 (LTV 60% at 3.1% APR)

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Some examples of how a little bit more up front makes a huge difference

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