Financing Improvements to a Rental Property: A Worked Return Calculation

Borrowing to improve a rental only works if the rent increase exceeds the cost. A calculation that tests it.

Improving a rental property using borrowed funds is a straightforward calculation that is rarely performed: does the additional rent exceed the additional cost, with enough margin to justify the disruption and the risk?

The situation

A landlord is considering renovating a dated apartment to increase its rent, funded by a facility secured against the property.

Assumptions (illustrative)

• Current annual rent: SAR 42,000.
• Expected rent after renovation: SAR 54,000.
• Renovation cost: SAR 130,000.
• Assumed financing cost: 5.5 per cent per year on the borrowed amount.
• Assumed vacancy during works: 2 months.
• Assumed additional maintenance saving from new equipment: SAR 2,000 per year.
• All figures are illustrative assumptions used to demonstrate the method.

Step 1: Additional annual income

SAR 54,000 less SAR 42,000 equals SAR 12,000, plus SAR 2,000 saved maintenance equals SAR 14,000.

This is the gross benefit before any financing cost, and it recurs annually, which is what makes improvement worth considering.

Step 2: Annual financing cost

SAR 130,000 at 5.5 per cent equals SAR 7,150 per year.

The cost also recurs, though it ends when the facility is settled while the rent increase continues.

Step 3: Net annual benefit

SAR 14,000 less SAR 7,150 equals SAR 6,850.

Positive, which means the improvement earns its financing cost with a margin.

Step 4: Cost of vacancy during works

Two months at the current rent equals SAR 7,000, incurred once.

This is a one-off cost that the first year absorbs, reducing the first-year benefit to roughly break-even.

Step 5: Payback period

The one-off vacancy cost is recovered within the first year of the SAR 6,850 net benefit, with the benefit continuing thereafter.

The improvement is justified on these assumptions, provided the expected rent is achievable.

Step 6: Testing the rent assumption

If the achievable rent is SAR 48,000 rather than SAR 54,000, the additional income falls to SAR 8,000 and the net benefit to SAR 850.

The entire calculation rests on the rent assumption, which is why it should come from comparable evidence rather than from hope.

What changes the answer

• A renovation overrun reduces the return directly and is common in older properties.
• Longer vacancy during works extends the payback period.
• If the improvement also reduces vacancy between tenancies, the benefit is larger than the rent increase alone suggests.
• Rising financing costs on a variable arrangement compress the margin.

What the numbers tell you

• Base the expected rent on comparable renovated units, not on the increase you hope to achieve.
• Include the vacancy during works as a real cost of the decision.
• Count maintenance savings from new equipment, since they are part of the benefit.
• Test the calculation at a lower rent assumption before committing.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

If you are weighing a financing decision, Domira can review the offers, model the total cost and stress test the obligation with you before you sign anything.