The Block was a hugely popular TV show last year.
Three gruelling months of sleeplessness and renovations paid off for the couples competing in last years 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.
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.
WHAT CAN YOU DO TO GET INTO RENOVATIONS?
As signs point to softer growth conditions for Australian property over the coming months, “manufacturing” capital growth through renovations is a smart strategy.
That’s something we specialise in at Metropole – last year our team undertook over 80 renovations for our clients – some for proeprties we purchased for them, others for properties they already had in their portfolio.
If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.
Please click here to organise a time for a chat. Or call us on 1300 20 30 30.
When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.
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