Renovating an Older Saudi Building for Rental: A Worked Example of the Return

A worked example of buying an older residential building, renovating it and re-letting: all-in cost, lost rent during works, new income and the incremental return.

Older residential buildings in Saudi cities can offer foreign investors a value-add opportunity: buy at a price based on tired rents, renovate, and re-let at higher rents. Whether it works depends on the return on the renovation money itself, not on the total yield after works. The worked example below separates the two with illustrative figures, and shows why lost rent during works and a contingency belong in the cost.

The situation

A foreign investor, through an eligible entity, is looking at a 12-apartment building from the early 2000s in a permitted zone. Units are let at below-market rents because of their condition. The plan is to renovate units and common areas, then re-let on Ejar leases at higher rents.

Assumptions (illustrative)

• Purchase price SAR 6,000,000; Real Estate Transaction Tax at the published headline rate of 5% borne by the buyer; other acquisition costs SAR 90,000.
• Current rent SAR 30,000 per unit per year at 85% collection; operating costs 30% of collected rent.
• Renovation SAR 150,000 per unit plus SAR 600,000 for common areas, with a 15% contingency.
• Works take 9 months, during which current collected rent is lost.
• Post-renovation rent SAR 50,000 per unit per year at 92% collection; operating costs 25% of collected rent.

Step 1: All-in purchase cost and current return

Tax: SAR 6,000,000 multiplied by 5% equals SAR 300,000. All-in: SAR 6,390,000. Collected rent: 12 multiplied by SAR 30,000 multiplied by 0.85 equals SAR 306,000. Net: SAR 306,000 minus 30%, which is SAR 214,200. Yield: about 3.35%.

On current rents the building is a poor investment, which is why the price reflects its condition.

Step 2: Renovation budget with contingency

Units: 12 multiplied by SAR 150,000 equals SAR 1,800,000. Plus common areas: SAR 2,400,000. Contingency: 15% equals SAR 360,000. Total: SAR 2,760,000.

Older buildings hide problems behind finishes, so a contingency is part of the budget, not a margin.

Step 3: Rent lost during works

SAR 306,000 multiplied by 9 divided by 12 equals SAR 229,500.

Lost income is a real cost of the project and must be funded like the works.

Step 4: New income after renovation

Collected rent: 12 multiplied by SAR 50,000 multiplied by 0.92 equals SAR 552,000. Operating costs: 25% equals SAR 138,000. Net: SAR 414,000.

Better condition supports higher rent, better collection and lower operating costs.

Step 5: Total return after renovation

Total invested: SAR 6,390,000 plus SAR 2,760,000 plus SAR 229,500 equals SAR 9,379,500. Yield: SAR 414,000 divided by SAR 9,379,500 equals about 4.41%.

The total yield improves, but looks modest because it blends the renovation return with the weak original purchase.

Step 6: Incremental return on the renovation

Extra net income: SAR 414,000 minus SAR 214,200 equals SAR 199,800. Renovation money: SAR 2,760,000 plus SAR 229,500 equals SAR 2,989,500. Return: SAR 199,800 divided by SAR 2,989,500 equals about 6.68%.

This is the figure that decides whether renovation is worth it: each riyal spent on works earns about 6.7% a year in this example.

What changes the answer

• Structural or waterproofing problems found during works can consume the contingency and more.
• Rent restraint measures may limit how far rents can rise after renovation, so confirm the rule for re-let units.
• Existing tenants on registered leases may not leave on your timetable, extending the works period.
• Permits for significant works, obtained through the municipality, add time that must be in the programme.
• If post-renovation rent is SAR 45,000 instead of SAR 50,000, extra net income falls to SAR 158,400 and the incremental return drops to about 5.3%.

What the numbers tell you

• Judge a renovation on the extra income it creates relative to the extra money it needs.
• Include lost rent and a contingency in the renovation cost.
• Check tenant positions, permits and any rent rules before buying.
• Commission a structural and services survey before you set the price.

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.

Domira works with foreign investors on the property side of entering Saudi Arabia: finding land or premises, due diligence, design, construction and asset management. For licensing, tax and legal steps, work with a licensed adviser; we coordinate with yours so the property decision fits the structure you choose.