The Block was a hugely popular TV show last year. Three grueling months of sleeplessness and renovations paid off for three of the four couples competing in 2010 series of The Block, who on the face of it seemed to sell their apartments for a profit.
Not surprisingly it encouraged a new generation of property investors to turn their hands to renovation.
But if you ran the renovations of The Block as a business and added stamp duty, buying and selling costs, interest for the holding period and payments for labour; there was no commercial profit in doing these renovations.
And it could be the same again this year….
Watercress, the production company behind The Block bought four unrenovated homes for $3.6 million in November last year after they passed in at auction for $2.85 million. Once you add stamp duty and acquisition costs this will bring the cost of each house to around $950,000 before the renovations begin.
With properties at the top end of Melbourne’s property market struggling to achieve prices anything like last year the result of this years show will be very interesting.
Now don’t get me wrong…I think renos are a great strategy in our current flat property markets. They increase the value of your property, make it more appealing to tenants, increase the rents and manufacture depreciation allowances.
But my strategy is to buy, renovate, refinance and hold for the long term. It’s just too hard to make money out of a “buy renovate and sell” strategy.
So where do you start? And how do you ensure that you don’t end up over-capitalising, as many investors do?
Here are four rules I suggest you follow in order to make the most of a “renovate for profit” property investment:
1. Determine the “right” purchase price.
Buying a renovator’s delight at the right price is crucial in ensuring that you are going to make some money when you finish your refurbishments. If you pay too much for your property at the outset, you will be “chasing your tail” trying to make the refurbishment profitable.
Start out by determining what the end value of the property will be when you have completed all planned works. You can do this by researching the value of similarly renovated properties in your area.
Once you have this end value in mind, draw up an initial project budget to calculate your approximate renovation expenses. You should also consider getting a building and pest inspection on the property so you know exactly what you’re getting yourself into and can plan your budget accordingly.
Now, subtract all your costs from the end value, allow for a profit margin and this will give you a fair idea of how much you can afford to pay for your property in order to make your investment financially viable.
2. Be realistic with your budget.
The truth is that the job will usually cost you more than you expect, and take longer than you planned. With today’s shortage of good labour, it’s hard to get tradespeople to quote on renovation jobs – we’ve all heard stories where “the budget blew out” and the project took weeks longer than expected.
It’s never as easy as they make it look on those TV shows. And, funnily enough, the tradespeople never look as good as they do on the shows either – I have never come across tradespeople with neatly pressed overalls!
3. Consider the type of tenant you wish to attract.
Think about the type of tenants you want to lease your property to and renovate with them in mind. Talk to your property manager to determine the predominant demographic seeking accommodation in the area and plan your renovations accordingly.
4. Don’t get personal!
Another mistake I see investors make is that they become too personal about the renovation project they are undertaking. Remember, you won’t be living in the place yourself, so putting your own personality into the property is not necessarily a good idea.
If you keep things simple and the decor neutral – simply make the property liveable and functional – you can’t go wrong.
Property renovating is not a license to print money. It’s hard work if you intend to do it yourself but it’s a great way to manufacture capital growth.
A good example of how property renovation can work for inevstors is an acquisition we made on behalf of clients last year that required refurbishment and has since been renovated throughout.
The two bedroom, 1 bathroom apartment with lock up garage was purchased in the suburb of Marrickville in December for the sum of $395,000.
Our clients were interested in buying an investment for their portfolio that would not only provide strong long term capital growth, but that also had value add potential.
This property was an excellent fit, located in a suburb with proven solid growth prospects and requiring a cosmetic makeover to bring it up to date and make it more appealing to tenants. In addition, it offered significant tax depreciation benefits and the prospect of a good rent yield on completion.
With new flooring installed, along with a new kitchen and bathroom, as well as a fresh coat of paint, this apartment did not disappoint. It was recently appraised at a value of $470,000 and is currently returning the happy investors a 5.6% yield at a rental of $430 per week.
If you would like to learn more about how youcan benefit from the assistance of our team at Metropole to find a renovator’s delight that would be perfect for your next property investment, please click here to attend one of our free property briefings.
George Raptis is a director of Metropole Property Investment Strategists in Sydney. He shares his 22 years of experience in the property industry as a licensed estate agent and active property investor. Go to www.metropole.com.au