Have you watched too many episodes of popular television shows like The Block?
Feeling inspired to take a run-down wreck and make it new again?
It all looks so simple and glamorous, with random ‘beautiful people’ tucking their perfectly styled hair into oddly flattering hard hats.
But the reality of a large-scale renovation project is very different to the ‘TV reality’.
For a start, there’s no mention of bureaucratic battles for council approval or the real financial, emotional and time commitment required to successfully pull it all off.
Don't get me wrong.
I’m certainly not trying to dissuade you from adding value to your property investment through carefully considered improvements.
In fact, I promote the improvement of older dwellings as a great way to “manufacture” capital growth and increase your rent returns all at once, as long as you understand the formula for successful renovations.
So to set you on the path to renovation riches, rather than a DIY disaster, here are ten things you must know before picking up that hammer.
Improving your own home to enhance its liveability for your family will generally entail a very different approach than fixing up a rental property.
In the former instance, it’s about comfort more than cost and compromise.
Of course, you don’t want to over-capitalise, but it’s not as critical that you have a significant financial margin between what you spend and what you stand to make.
However, if the plan is to grow your rental yield and increase the equity in your property, you must focus on the financial considerations first and foremost.
The process must be based on hard facts and logic rather than emotion.
Maybe you’ve spruced up your own home and feel confident taking on a project that’s all about the profitability.
But one DIY job does not the expert make.
If renovations were so easy to cash in on, why do so many people walk away no better off at the end of a very exhausting and stressful experience?
Firstly, you need to be aware of which jobs you plan on undertaking, if any, require council permits and how to go about the application process with your local government authority.
Then there’s due diligence to measure the project’s viability, risk assessment and mitigation, time and cost management and contingency planning, coordinating tradespeople and various building processes to work through.
Engaging a properly qualified builder or project manager to oversee your renovations is definitely advisable.
If you prefer to get your own hands dirty, I’d recommend engaging a properly qualified professional for the first few small-scale developments to give you some much-needed ‘on the job’ guidance, before attempting to go it alone.
If like many Australians you work upwards of 50 hours per week, can you really expect to take on a major renovation project all by yourself?
In order to complete a refurbishment on time and to budget, the reality requires someone to be on-site to direct proceedings and make sure things run as smoothly as possible.
If you can’t commit to the necessary hours and days, employ a qualified project manager.
Although their fees may add another 10 or so to your overall renovation costs, it is likely to be a worthwhile investment.
Remember, the longer it takes to complete the renovations on your asset, the longer it will take to start generating that all-important cash flow from your rental property.
Furthermore, failing to schedule the appropriate trades at the right times and working toward a well-thought-out schedule often means lost opportunity.
In other words, while one project drags on indefinitely, you are potentially missing out on other investments that could see you grow your portfolio sooner.
I’m talking about the property that presents with ideal development potential in order to realise a beneficial return.
In order to recognise a ‘renovator’s delight’, you need first to determine what type of profit it might deliver.
Ideally, you should aim to achieve $2 in added value for every $1 spent on cosmetic improvements.
Obviously, you don’t want to overcapitalise by paying too much for the dwelling before you even get cracking on the renos, so it’s critical to know the location and get a good handle on comparable values.
Consulting local real estate agents to find out what buyers and tenants expect from property in the area is advisable, in order to determine if the investment you’re considering will deliver a profit.
What makes a good tradesperson?
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You need to answer this question before you even start scouring the Yellow Pages for the professionals you’ll require on-site.
Quality workmanship at a reasonable price is obviously the first thing that comes to mind, but availability and reliability are just as important.
Some of the ways you can source good people for your project team include:
- Referrals from friends or colleagues
- Ask at your local hardware store – they’ll often have ongoing relationships with tradespeople and come to know who’s more reliable
- Stop at nearby worksites and ask for business cards
Chances are you’ll end up working closely with the various tradespeople you employ, so make sure you can sustain a good relationship and effective communication with them.
Deciding to acquire a whole new set of handyman (or handywoman) skills by tackling a renovation project is a noble thought, but what will the results be?
If you want to be hands-on, I admire your courage, but I also hope you know a little more than how to fire a nail gun!
Keep in mind that the finished product should be worth at least 20 to 30 per cent more than when you started and appeal to today’s discerning tenant market.
Will your finishes be up to scratch, or are you better off directing skilled tradespeople while you oversee works, rather than attempting to carry them out on your own?
This should really be at the top of the list, because obviously if you can’t get the finance you need to first purchase and then improve the property you have in mind, everything else is a moot point.
Ideally, you’ll be able to use existing equity in a property investment that you’ve held in your portfolio for a little while before deciding to carry out improvements, rather than digging into your own pocket.
To this end, I like to purchase dwellings that are liveable as is but will generate a better rental income and attract stronger capital growth with a few cosmetic tweaks as time and finances allow.
Just be aware that if your project becomes a larger-scale undertaking and you need to seek additional funding from your lender, you may have to do a bit of debt restructuring to make the figures work.
After your first couple of renovations, you’ll have a much better idea of the people and processes involved and how long it all takes to play out.
Allow a contingency of at least 10 per cent when working out costings and create a realistic budget that accounts for every possible aspect of work required to deliver the desired outcome.
Focus more on aesthetic improvements, rather than costly structural works that will eat away at your bottom line but do little to add end value to your asset.
You’ll also need to factor in any loan repayments you have to meet while the property sits vacant, and maintain a tight but manageable schedule to avoid time and budget blowouts.
Chances are, unexpected delays will occur on your project as they do for many developments, so keep these in mind when planning your contingency as well.
Some property investors seem to have made a fairly good living from becoming professional project managers and adopting a buy, renovate and sell strategy.
I often wonder though, how much long-term wealth could their investment have generated if they retained it as a high-growth rental.
For my money, the buy, renovate and hold approach makes a lot more sense and allows you to use any additional equity manufactured from all that hard work to invest in additional high-growth assets and further nurture your nest egg.
Whatever strategy you adopt when considering a renovation project, it must align with and complement your overall investment objectives.
All the planning in the world can sometimes fail to account for unforeseen eventualities that throw a spanner in the works.
Perhaps you’ve done all that hard work, only to find that the market or interest rates have moved unfavourably against you.
Of course, these potential issues are not so problematic if you’re keeping the finished property investment, which is another reason why I favour a buy, renovate and hold approach – timing the market is not so essential, and as such, there’s a greater margin for error.
At Metropole, we’ve completed hundreds of small to large-scale development projects on behalf of clients, so we know what it takes to make property renovations a lucrative way to supercharge your investment portfolio.
You can trust the team at Metropole to provide you with direction, guidance and results.
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