The Pros And Cons Of Leasehold Improvements
As a landlord, you have a duty to keep your leasehold looking sharp for your tenants. This means if anything goes wrong, such as the plumbing, you need to fix it so your tenant can live comfortably again. These sorts of things fall under leasehold improvements, and they can make or break your relationship with your tenant.
However, although you do need to ensure your tenant is living in good standards, there are pros and cons when it comes to some leasehold improvements. If you are unsure whether you should conduct a specific improvement, you may want to read this guide first to help you out.
What are leasehold or tenant improvements?
Leasehold improvements, which are also known as tenant improvements, are types of maintenance work and changes made to a leasehold so it is better for a tenant to move into. They make the area more attractive and can help your tenant appreciate the condition of the leasehold more than if there was a lot that needed fixing.
Leasehold improvements include a huge scope of things, from small jobs such as repainting the leasehold to a full renovation that could take a couple of months. As a landlord or property manager, you can sometimes do the work yourself if it is a small job, but you’ll have to hire a private contractor most of the time. Due to this, it can cost a bit of money which is why the pros and cons are looked at to see whether the job is worth doing.
Examples of leasehold improvements
There are two main types of leasehold improvements:
Cosmetic leasehold improvements are changes to the leasehold that make it look better and more comfortable for a tenant to live in. Most of the time, these improvements are part of a landlord's responsibility, and if they aren’t done, the tenant may be able to raise the issue with the appropriate council.
A cosmetic improvement could simply be changing the light fixtures and bulbs or fixing the cabinet doors if they are loose or have fallen off. Most of these are temporary improvements, and they don’t cost that much. Sometimes the landlord or property manager can even make these changes themselves.
Functional leasehold improvements are much more permanent changes because they change the actual structure of the leasehold. It could include building new walls, replacing the entire flooring, or redoing the plumbing system. These should typically be done before a tenant has moved into a leasehold because they take a bit longer.
Since the work will take a while, functional improvements cost much more than cosmetic improvements. The landlord or property manager most likely cannot complete the changes themselves, so they will need to hire private contractors.
These are the types of improvements where the pros and cons are weighed to see whether it’s worth making them.
Advantages of leasehold improvements
- Increases the value of the leasehold
A leasehold works just like any other rental, where you find a tenant to pay you a set amount each month so they can either live or work in the space. However, people don’t want to pay much for a space that is falling apart or old-fashioned. That’s why it’s a good idea to make at least some leasehold improvements because it means you can charge more for rent each month.
At the same time, you’re also increasing the sale value of the leasehold. If you ever decide to sell the leasehold in the future, you will be able to sell it for more money. Leasehold improvements offer a better return on your investment, so it’s good to think about the long term as well when making the changes.
- Better chance of finding a tenant
As we’ve mentioned, a tenant probably won’t be interested in a leasehold space that has many issues. Tenants are going to look for a place that meets all their needs, has working plumbing, and is comfortable for them to live or work in.
When you have a smaller pool of prospective tenants, you’re also opening yourself to possible issues. They may not pay their rent, or they could even cause further damage to the leasehold. When you make improvements, you expand your tenant pool and increase your chances of finding a quality tenant who will stay with you over time.
- Higher rate of renewals
Finding a tenant isn’t easy in the first place, so you don’t want to have a high turnover rate when each contract ends. If you don’t comply with your responsibility of making the necessary cosmetic improvements needed for your tenant, such as replacing a light fixture when it has broken, then your tenant won’t want to stay with you for another term.
Renewals mean you have a steady cash flow and don’t have to spend extra time trying to find another tenant when one leaves. You don’t know how long this could take, so it could be a few months before you find another quality tenant and receive rent again. Making the improvements won’t take much time and will certainly help boost your tenant retention, helping you in the long run.
Disadvantages of leasehold improvements
- They can be expensive
Leasehold improvements, especially when they are functional, can end up costing a lot of money. For example, if the entire plumbing system has failed, you could end up forking out a couple of thousand dollars to get a plumber to repair it. This can sometimes negatively affect your income from the leasehold.
However, some leasehold improvements are worth it. You won’t have a tenant live in the leasehold without proper plumbing. The time when it is a disadvantage is when you spend money on a leasehold improvement that isn’t necessarily needed. You end up with less money and don’t get anything out of it.
- The next tenant may not want them
Leasehold improvements are an investment on the landlord or property manager’s part. They are put in place to make the tenant happy and increase the chance of getting tenants in the future. However, not every tenant wants the same thing, and you may make an improvement that the current tenant wants, but the next tenant does not.
If not every tenant is happy with the leasehold improvements, it can make things complicated. You may have to spend more money to reverse or change the improvement. Therefore, you need to think hard about whether it will be worth it.
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