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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