Many of today’s renters are making a calculated choice to rent rather than own. Renting is becoming an increasingly competitive alternative to homeownership, especially if you consider the calibre of stock available to today’s apartment dwellers. With that said, income property owners fighting a high vacancy rate or facing steep competition for tenants may need to consider strategic capital improvements to achieve a competitive edge on the rental property market.
The right capital improvements can help rental property owners to build net operating income more effectively, while increasing the overall value of the property. Today on the blog, we discuss several capital improvements that are well worth the investment.
Capital improvements for your rental property: Key takeaways
- A capital improvement is a renovation that will enhance the value of an income property. It usually involves a structural change or restoration. It could also be a renovation that will prolong the property’s useful life.
- If the renovation provides lasting benefits and maintains or improves the property in some way, you may be able to claim the capital improvement on your tax return.
- Energy-efficient retrofits will positively impact your property’s bottom line and are a selling point for prospective renters. For instance, upgrading to energy-efficient furnaces, water heaters, taps, toilets, lightbulbs, and appliances.
- Roofing and insulation help to regulate indoor temperature by preventing warm and cool air from escaping. Upgrading roofing and insulation will protect against air leaks and add value by decreasing energy costs.
- Standard window models can be prone to air leaks, leading to energy loss and higher utility bills. Energy-efficient windows are designed to prevent air leaks, making it possible to use less heating or cooling to regulate internal air temperature.
- Energy-saving windows can be used in conjunction with smart thermostats to regulate and moderate heating and cooling in a way that saves on overall utility costs.
What is a capital improvement?
A capital improvement is an upgrade or renovation that will enhance the functionality, efficiency, and overall value of an income property. It could also be a renovation that will prolong the property’s useful life.
Capital improvements often involve a structural change or restoration. As such, there’s a difference between repairs that are needed because of normal wear and tear and a capital improvement.
Depending on the nature of the improvement, you may be able to claim capital improvements on your tax return, potentially saving you thousands. Per the Canadian tax code, claimable renovations must provide lasting benefits and maintain or improve the property in some way. If you’re relying on the tax credit, make sure to consult a tax professional to confirm that the renovation you have in mind will qualify.
Upgrade inefficient fixtures and appliances
Energy-efficient retrofits are perhaps the number one upgrade that will (a) positively impact your property’s bottom line, and (b) be a great selling point for prospective renters. And for good reason! These days, energy efficiency tends to go hand-in-hand with cost reduction. For example, upgrading inefficient building mechanisms, such as the furnace and/or water heater, will not only cut down on energy consumption, but it will also save on utility costs and overall operating expenses.
The same goes for fixtures that are prone to slow leaks, such as taps and toilets. These are especially dangerous because they can go undetected and end up negatively affecting NOI. To avoid being blind-sighted by a sky-high water bill, water consumption should be closely monitored and routinely brought up to spec.
To incentivize homeowners to upgrade to energy-efficient heating and cooling systems (amongst other energy-efficient upgrades), utility companies offer government-backed grants and rebates, which differ from province to province. For example, Enbridge offers rebates for insulation, air sealing, new windows/doors, water heaters, boilers, and furnaces. They also offer home energy assessments, so that building owners can pinpoint exactly where the property is losing energy, and how to better cut down on costs and energy consumption. Save On Energy is another source for energy affordability and retrofit programs.
Finally, upgrading lighting fixtures to LED will not only improve the brightness and intensity of lighting, but LEDs also last longer than their counterparts. In many cases, LEDs boast a lifespan of up to 50,000 hours, which is 50 times longer than a typical incandescent, 20 to 25 times longer than a typical halogen, and 8 to 10 times longer than a typical compact fluorescent.
Replace old roofing and/or damaged insulation
A roofing renovation is another important upgrade to consider. A roof in poor shape can become prone to air and water leaks, mould, and mildew, and can lead to higher operating expenses, decreased NOI, and larger problems down the line.
Conversely, a good roof adds value. A roof that’s up to spec will serve as a barrier against moisture, extremes of weather, and debris, and will keep your warm and cool air from escaping.
Much like roofing, insulation also acts as a barrier from the outside world and helps to regulate your indoor temperature by preventing warm and cool air from escaping. With that said, insulation can also become compromised by water damage, mould, dirt, pests, air leaks, and punctures, all of which decrease its effectiveness and can lead to a higher utility bill. As such, insulation should be monitored regularly and replaced if it incurs damage or every 15 to 20 years.
Add energy-saving windows and a programmable thermostat
While you may not give much thought to your windows if they’re in good condition, standard window models can be prone to air leaks, leading to energy loss and higher utility bills. Alternatively, energy-efficient windows are designed to prevent air leaks, making it possible to use less heating or cooling to regulate internal air temperature. Depending on your budget, you can consider dual-pane or even triple-pane glass to insulate your property and bolster energy efficiency. An added bonus of multi-pane windows is soundproofing.
Another way to manage and moderate heating and cooling is by installing a smart learning thermostat. Smart thermostats allow for continuous energy and cost savings by building a custom heating and cooling schedule based on the activity within the unit. Some models can even use the weather forecast to more effectively regulate indoor temperature. Smart thermostats are a great investment for rental properties because they adjust the temperature without manual adjustments.
Improve outdated and inefficient kitchens and bathrooms
When it comes to kitchens and bathrooms, practicality, simplicity, and quality are key. While it’s important for these rooms to look nice, it’s even more important for them to be functional and built to last. For great return on investment, swap appliances for new, energy-efficient models and make sure to match the finishes of the oven, refrigerator, dishwasher, and microwave for a polished and cohesive look. If budget permits, consider swapping your backsplash for glass tile, which is low-maintenance and easy to keep clean.
In the bathroom, keep it simple and modern. Swap out anything that looks outdated, opt for water-efficient toilet and showerhead models, maximize storage where you can, and make sure to invest in a good ventilation system, to protect against mould and mildew.
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