Buy, renovate and hold is one of my favourite property investment strategies.
I enjoy taking a dwelling that’s been a bit neglected and breathing new life into it, making it into a home my tenants will love and want to care for and more importantly, it’s a great way of manufacturing equity for my property investment portfolio.
This strategy requires a lot of planning when it comes to successful execution, but over the last decade, numerous prime-time television shows have glorified the idea of buying a derelict hovel, throwing tens of thousands of dollars at it and selling for a tidy profit.
Making it all seem terribly easy and glamorous.
But the thing with property is this:
The way you make money out of property is not by buying, renovating and flipping.
In fact, after stamp duty, interest, holding costs, selling commission and tax there is rarely any profit in this strategy.
On the other hand buy, renovate, refinance and hold for the long term is a time tested investment strategy that works.
Why dispose of something you’ve (often literally) put so much blood, sweat and tears into – only to sacrifice profits to selling costs and possibly CGT - when you can hold onto it and use the power of time and leverage to realise its maximum wealth accumulation potential?
If you renovate and retain property you stand to gain so much more, with the potential to:
- Manufacture thousands of dollars in equity and fast-track your investment’s capital growth,
- Make your newly refurbished rental property attractive to a wider range of potential tenants
- Receive higher rental as your newly improved asset shines against its competitors.
- Get the tax benefit of extra depreciation allowances.
Of course, in order to achieve success using this strategy, there are a few necessary boxes to tick.
I call this our BRRRRR strategy - Buy, Renovate, Rent, Refinance and Repeat strategy.
Following are perhaps the 6 most important steps to take if you want to renovate for real investment rewards.
1. Keep it cosmetic
You want a ‘fixer-upper’, not a ‘tear-it-downer’.
Buyers and tenants will pay more for things they can see.
They don’t really care that you’ve spent all your money re-stumping, re-roofing and rewiring.
The market is becoming a lot more discerning and things that were once considered luxury items, such as dishwashers and high-end kitchens, are now expected.
This is particularly the case in fashionable, inner-city suburbs that attract more affluent purchasers and renters.
You need maximum bang for your renovation budget to avoid over-capitalising on structural changes that essentially add no tangible value.
Aside from painting walls and upgrading flooring, window furnishings and light fittings, the other works I would seriously consider doing are updating or replacing kitchen and bathroom.
This is usually where you get the best bang for your renovation bucks spent.
All of this can be done whilst keeping costs to a minimum, which leads me to the next important step…
2. Draw up a budget AND follow it
First things first…before you commit to purchasing a property that requires work, have it assessed with a professional building and pest inspection.
Then invite a couple of builders to quote on the necessary work in order to bring the property up to today’s standards.
From here, you should be able to safely draw up a working budget and get an idea of your overall outlay, by the time the property is ready to a tenant.
Consider all expenses – holding costs during the renovation period when you won’t have occupants helping out with interest repayments, as well as the improvements themselves.
Make sure to include a contingency – at least 10% of the overall budget – because you always seem to come up against unanticipated extras.
3. Identify and satisfy your market
One area that a lot of budding developers tend to overlook is their target market.
Failing to identify the typical local owner-occupier (who drives up values) and tenant (who pays your mortgage) demographic, and subsequently renovating according to their expectations, will bring all of your hard work undone and potentially see you over-capitalise instead of manufacture equity.
Speak to local agents and look at comparable properties to find out what buyers and tenants want and the type of improvements you can undertake to command (and potentially break) ceiling prices in the area.
4. Choose your property wisely
This ties in with knowing the local demographic in the neighbourhood you are considering.
If your target market were young professional singles and couples, you wouldn’t buy a sprawling family home on a quarter-acre allotment to tart up.
Likewise, you wouldn't purchase a two-bedroom apartment to renovate in an area that families favour.
When considering asset selection, it’s also important to know the likely value of the end product you intend to deliver.
5. Renovate for profits, not pleasure
Whilst you can attain both from renovating property, some investors get so caught up in selecting colours and kitchens that they lose sight of their end goal – making money!
While you want the property to be presentable, you also want to stick to your budget.
Don't be tempted to spend extra on ‘your dream kitchen’, because this is not ‘your dream’. Again, this is about satisfying market demand, not your own personal tastes and aspirations.
Then remember the wear and tear that’s likely to occur when your property is tenanted.
Lavish drapes that cost a fortune are likely to need replacing after your investment has been lived in for a few years, while neutral décor and easily maintained and cleaned surfaces are more tenant-friendly.
6. Put your plan into action
As with any well thought out property investment strategy, one of the ways beginning renovators frequently come unstuck is by over-thinking the acquisition.
If you’ve done all of the necessary homework, be honest with yourself about what constitutes a plausible project according to your property investment needs and goals and feel confident in the knowledge you’ve gained, it’s time to take action!
Don’t fall into the trap of second-guessing and self-doubt that can come with over-analysis.
Be confident that you have covered your bases and undertaken sufficient groundwork to make the next move.
After all, the more time you spend pondering about the property, the less you have to make those all-important profits!