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For landlords and property investors, rental yield is one of the key measures used to assess whether an investment property is performing well.
A higher rent can improve the return from a property, but rent is only part of the picture. The purchase price, refurbishment costs, finance costs, void periods, running costs and long-term property value all need to be considered.
This is where refurbishment finance can play an important role.
A property that is dated, poorly configured, difficult to let or below its full rental potential may not produce the yield an investor wants from day one. With the right improvement plan, it may be possible to increase rental income, improve the property’s value and create a stronger refinance position.
However, refurbishment finance should be used carefully. The numbers need to work before the project starts, and the investor should have a clear plan for the works, rental strategy and exit route.
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What is rental yield?
Rental yield is a way of measuring the income a property produces compared with its value or purchase cost.
Gross rental yield is usually calculated by taking the annual rent, dividing it by the property value or purchase price, then multiplying by 100.
For example, if a property produces £18,000 per year in rent and is valued at £300,000, the gross rental yield would be 6%.
Net yield gives a more detailed picture because it takes account of costs such as mortgage payments, insurance, maintenance, letting fees, service charges, ground rent, management costs and void periods.
For investors, net yield is often more useful than gross yield because it shows how the property performs after costs.
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Why refurbishment can affect rental yield
A property’s condition has a direct impact on what rent it can achieve.
A dated or poorly maintained property may attract lower rent, longer void periods or a smaller pool of tenants. It may also struggle to compete with better-presented properties in the same area.
Refurbishment can help improve the property’s appeal, usability and rental value.
This may include:
- Updating kitchens and bathrooms
- Improving décor and flooring
- Repairing damp, damage or wear
- Improving heating, lighting or energy efficiency
- Reconfiguring layouts
- Creating additional lettable space
- Preparing a property for HMO or multi-let use, where suitable
- Improving a commercial or semi-commercial unit before letting
The aim is not simply to spend money on the property. The aim is to make improvements that support a stronger rental return, better tenant demand or a better long-term finance position.
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What is refurbishment finance?
Refurbishment finance is a type of property finance used to fund improvement works.
It may be considered where a property needs work before it can be let, refinanced or sold. It can also be used where an investor wants to improve a property so it performs better as a rental asset.
The finance structure will depend on the property, the borrower, the scale of works, the expected end value, the rental strategy and the exit plan.
Some refurbishment projects are relatively light, such as cosmetic updates, replacement kitchens, new bathrooms or general modernisation. Others are more complex and may involve structural work, layout changes, planning matters or change of use.
The type of works will influence which lenders may be suitable.
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Light refurbishment and rental uplift
Light refurbishment usually involves non-structural works designed to improve the property without fundamentally changing its use or layout.
This can be relevant where a property is already mortgageable but underperforming.
For example, a landlord may buy a tired buy-to-let property that is lettable in its current condition but only at a lower rent. Updating the interior, improving the presentation and resolving minor issues may help the property compete more effectively in the local rental market.
Light refurbishment may help where the property needs:
- New kitchen or bathroom fittings
- Redecoration and flooring
- Minor repairs
- Improved lighting
- Heating upgrades
- Better presentation for tenants
- Basic works between tenancies
These improvements can sometimes support a higher rent, reduce void periods or make the property easier to let.
The key is to avoid overcapitalising. Not every improvement will increase rent by enough to justify the cost.
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Heavier refurbishment and repositioning the property
Heavier refurbishment is usually more involved and may include structural changes, significant works, conversion, change of layout or preparation for a different rental strategy.
This type of project can have a greater impact on rental yield, but it also carries more risk.
For example, an investor may buy a property that is not currently suitable for letting, complete the necessary works, then refinance once it is habitable, lettable and producing income.
In other cases, the investor may be looking to reposition the property. This could involve turning a large house into an HMO, converting a building into flats, improving a multi-unit block, or upgrading a semi-commercial property so the commercial element becomes easier to let.
Where planning permission, building regulations, licensing or change of use are required, these should be understood before the project begins.
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Improving yield through better use of space
Refurbishment does not always mean simply making a property look better.
In some cases, the biggest improvement comes from using the space more effectively.
A property may have unused rooms, poor layouts, empty upper parts, dated commercial space, or accommodation that does not meet the expectations of the target tenant market.
For investors, the opportunity may be to improve how the property works as a rental asset.
This could include:
- Reconfiguring internal layouts
- Creating better bedroom or living space
- Improving shared facilities in an HMO
- Upgrading communal areas in a multi-unit block
- Making a vacant commercial unit more lettable
- Improving access, presentation or usability
- Separating residential and commercial areas more clearly
These changes need to be assessed carefully. The cost of the works, likely rental uplift, valuation impact and lender requirements all need to be considered.
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Refurbishment finance and the refinance strategy
Many investors use refurbishment finance as part of a wider buy, refurbish and refinance strategy.
The basic idea is to purchase a property, complete improvement works, increase the rental income or value, then refinance onto a longer-term mortgage once the property is ready.
This can be useful where the property is not suitable for a standard mortgage at the point of purchase, or where the investor wants to complete works before arranging long-term finance.
However, the refinance should not be assumed.
A lender will assess the property after the works are complete, including the valuation, rental income, condition, tenancy position and borrower profile.
Before starting the project, investors should consider:
- The purchase price
- The cost of works
- Professional fees
- Finance costs
- Contingency budget
- Expected rental income after works
- Likely valuation after works
- Long-term mortgage options
- Exit strategy if the refinance is lower than expected
A refurbishment project may improve the rental yield, but only if the final numbers support the strategy.
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Can refurbishment finance help with auction purchases?
Auction properties are often bought by investors because they offer speed, opportunity or scope to add value.
However, many auction properties need work before they can be let or refinanced. Some may not be suitable for a standard mortgage at the point of purchase.
Refurbishment finance or bridging finance may be considered where an investor needs to complete quickly, carry out works, then move onto a longer-term finance option once the property is ready.
This can be particularly relevant where the property has been bought below market value, has condition issues, or needs improvement before it can generate the intended rent.
The legal pack, valuation, completion deadline and funding route should all be reviewed before bidding.
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Semi-commercial and commercial refurbishment
Refurbishment finance can also be relevant for semi-commercial and commercial property.
For example, a mixed-use property may include a residential flat above a vacant commercial unit. The residential element may already produce income, while the commercial unit needs refurbishment before a tenant can be found.
In other cases, a commercial property may need improvement before it can attract the right occupier or support the rent the investor expects.
This can apply to shops, offices, small industrial units, hospitality premises or mixed-use buildings.
The lender will want to understand the property, the existing income, the proposed works, the likely tenant demand and the exit strategy.
Semi-commercial and commercial properties can be more complex than standard residential buy-to-let, so the finance route needs to match the property and the plan.
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Risks to consider before using refurbishment finance
Refurbishment can improve rental yield, but it does not guarantee a better return.
There are risks that need to be allowed for before the project starts.
Common risks include:
- Works costing more than expected
- Delays to completion
- Planning or licensing issues
- Contractor problems
- Lower-than-expected rental uplift
- A valuation that does not support the refinance
- Longer void periods
- Finance costs increasing the overall project cost
- The finished property not matching local tenant demand
A realistic budget and contingency are important.
The investor should also understand what happens if the project takes longer than expected, or if the refinance does not produce the amount originally planned.
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What should investors check first?
Before using refurbishment finance to improve rental yield, the investor should make sure the project is based on realistic numbers rather than assumptions.
It is important to understand the current property condition, the scope of works, likely rental demand and the finance options before committing to the purchase or project.
Investors should check whether the proposed improvements are likely to increase rent, reduce void periods, improve the valuation or make the property easier to refinance.
They should also consider whether the works are appropriate for the local market. A high-spec refurbishment may not always produce a proportionate increase in rent, especially if tenants in that area are unlikely to pay significantly more.
The best refurbishment projects are usually those where the cost of the works is justified by the improved income, valuation or long-term investment position.
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How Advocate Finance can help
Advocate Finance works with landlords, property investors and developers looking to fund refurbishment projects.
We can help assess whether refurbishment finance, bridging finance, auction finance, specialist buy-to-let, HMO finance, semi-commercial finance or commercial finance may be suitable for the project.
The right option will depend on the property, the proposed works, the borrower’s experience, the rental strategy and the exit route.
If the plan is to refurbish and refinance, Advocate Finance can also help consider the likely long-term mortgage options before the work begins.
This can help investors understand whether the proposed finance structure supports the wider rental yield strategy.
If you are considering a property refurbishment project, speak to Advocate Finance before committing to the purchase or starting the works.
Contact Advocate Finance for a free initial assessment.
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FAQs
Can refurbishment finance improve rental yield?
Yes, it may help where the works increase rental income, improve tenant demand, reduce void periods or allow the property to be refinanced on better long-term terms. The improvement needs to be supported by realistic numbers.
Is refurbishment finance only for major works?
No. Refurbishment finance may be used for lighter improvement works or more substantial projects, depending on the lender, property and proposed works.
Can I use refurbishment finance for an auction property?
Yes, it may be considered for auction purchases, especially where the property needs work, completion is required quickly, or a standard mortgage is not suitable immediately.
Can I refinance after refurbishing a property?
It may be possible to refinance once the works are complete and the property is suitable for a long-term lender. The refinance will depend on valuation, rental income, condition, tenancy position and lender criteria.
Can refurbishment finance be used for HMOs?
Yes, refurbishment finance may be suitable for HMO projects, but the lender will want to understand the works, licensing requirements, planning position, rental strategy and exit route.
Can refurbishment finance be used for semi-commercial property?
Yes, it may be suitable where a semi-commercial property needs improvement before it can be let, refinanced or repositioned. The lender will consider the residential and commercial elements of the property.
