Your Complete Guide to Renovating for Profit

Making a tidy profit renovating a property seems like a very attractive proposition.

And that’s why more real estate investors are turning their aim at renovations.

Buy low, renovate cheap, and add substantial value is the aim of the game.

It sounds simple enough, right?

While there is always strong demand for renovated properties — as there are always people wanting to move into a property that has been renovated and looks fresh and finished — there is a strategy involved in profitably transforming a ho-hum dwelling into something spectacular!

 

IS IT APPROPRIATE TODAY’S MARKET?IS IT APPROPRIATE TODAY’S MARKET?

The answer is yes! Even more so now that the housing market have slowed down — you can’t count on the market doing the heavy lifting.

Property MarketAdding value through renovations is a great way to increase your rents and “manufacture capital growth.”

And that’s what I’m going to share with you in this Complete Guide to Renovating for Profit.

But let’s get one thing clear from the start…

Many people believe they’ll be able to renovate for profit with a buy, reno, sell strategy, but as most property flips flop, I’m not an advocate of this technique.

I know seminars say sell and make profit, but having been involved in renovations for over 30 years I’ve learned that, unless your do major structural renovations or undertake a property development,  you won’t make a big enough profit to sell on completion.

And that’s definitely not for beginners.”

MY BRRRR STRATEGYMY BRRRR STRATEGY

Instead I prefer the BRRRR strategy of ‘Buy, Renovate, Rent Out, Refinance And Repeat…

It’s just to hard to make a profit flipping properties that you’ve renovated, which involves losing big amounts of money by potential paying Capital Gains Tax, plus stamp duty on the next property.

But if you renovate with the intention to retain property, then you stand to retain all the benefits you’ve created in the renovation.

BrrrrThese include:

1. Low vacancies — As your newly-refurbished property is now attractive to a wider range of potential tenants, who are generally willing to pay a premium for better quality housing.

2. Higher rental returns — Receive higher rental as your newly improved asset shines against its competitors.

3. Depreciation benefits — Second-hand properties may attract fewer deprecation claims since the Federal Budget in 2017, but once you renovate you gain the tax benefit of extra depreciation allowances.

4. Manufactured Capital Growth — Using this strategy, you can essentially build your asset base, create capital growth and increase your overall wealth.construction

Once a year at my annual Property Renovations and Development Workshop I give you the blueprint that I have used for successfully building a multi-million dollar property portfolio through renovations and development. 
development plans

This is a training event – there is nothing to sell the back of the room- no expensive courses and definitely no properties for sale.

Click here now and get all the details, reserve your spot and join me on October 20th and 21st – only  a short while left! 

 

8 STEPS TO RENOVATION PROFIT8 STEPS TO RENOVATION PROFIT


With this is mind, here are 8 steps that I believe will help you on your way to a profitable renovation strategy:<

1. Why?
What’s the purpose of this project — in my mind it should be one (or all four) of the benefits I’ve mentioned above.

Prepair Renovation2. Preparation — finance & structures

Obtaining finance for your renovation project can be a little more of a dance than when buying a regular property.

You’ll need to borrow enough money to cover the property purchase and renovation costs and have some buffer for issues that crop up or any delays in the schedule.

Structuring your finances is a crucial task before the ‘real’ work can take place.

Are you using your existing cash flow to fund your renovation? Your equity?

3. Where?

Around eighty percent of your property’s investment success will come from choosing the right location and the balance from buying the right property in that location.

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And as you’re planning to keep your renovated property as a long term investment, selecting the right location will be critical.

Research local markets to identify price points, what buyers want in a home or apartment and all the usual factors such as supply and demand and times on the market and most importantly a location with multiple long term drivers underpinning it’s future capital growth.

In particular I look for suburbs that are gentrifying — in other words where others are also renovating their properties

Once you’ve pinpointed a suburb with profit potential, target a property that fits the size of the renovation you want to undertake.

Don’t do it the other way around — find a property first and then try and then try and convince yourself this is where you should invest.>

4. What? Buying the right property

Find a property with value add potential but also one has a functional floor plan and one that doesn’t require structural work.

Buy PropertyOf course, if you’ve never picked up a hammer before but you’re keen to move forward with a renovation, it makes sense to start with a small project.

Be sure to acquire the research and knowledge that will allow you mitigate your risk and give you the best chance of real success.

That means knowing how to protect yourself, how to choose the right property, and how to make sure it turns a profit for you in the en”>

5. Purchase at “wholesale”


You need to acquire your property “at wholesale” (with built in capital growth) so that you can renovate for pro

6. Budgeting and planning

There’s no hard and fast rule, but you should be fairly safe if your renovation budget doesn’t exceed 10% of the property’s value.

Be mindful of how long your renovation will take, as every day you delay  costs you another 24 hours’ worth of interest on the mortgage, at a time when no rent is coming in.

And it’s important not to become emotionally involved and over capitalize.

Renovate BudgetYou see there is not a straight line between what you spend and how much value you add — some improvements (especially hidden ones like electrical and plumbing works) don’t add much value at all.

On the other hand if you undercapitalise, you won’t maximise your potential profit.

Don’t forget to leave a significant contingency (often up to 20% if you’re inexperienced) in your budgets because there always seem to be cost overruns and unexpected surprises in every renovation project.

It’s all about being prepared for the worst, so make sure you have sufficient funds availaa>

7 . The Renovation

Now you finally start to get some your hands dirty, but I don’t suggest you do the work yourself — t instead, unless you’ve got the skills and the time, I recommend you act as project manager.

This list includes many of the things you’ll need to consider during the renovation stage of your project:

1. Work out which tasks to outsource to others.

  1. What jobs require you to be licensed — e.g. Plumbers and electricians
  2. Consider hiring a project manager if you’re not experienced

2. Project ManagerWhat requires Council Approval?

  1. What aspects may need this e.g changes to exterior (character areas)
  2. Internal structural changes
  3. Moving plumbing,
  4. Adding to the floor area  or additional rooms
  5. A rubbish skip in the street

Council approvals will require documentation and architect’s drawings.

3. What needs Owner’s Corporation (Body Corporate) Approval?

  1. Talk to the owners corporation manager and check their rules and limitations
  2. Permission to put an airconditioner on the balcony?
  3. Put a skip in yard or car park ?
  4. Structural changes, changes to exterior?

4. Source your trades

  1. Get a few quotes, especially for bigger jobs
  2. Set out a scope of works in writing, so everyone quotes on same information
  3. Have written specifications available on site when trades arrive.

5. Purchase materials

  1. Buy MaterialsFollowing discussions with trades you may find it is cheaper if they may supply their own materials
  2. Open a trade account with your preferred supplier to access discounts
  3. Organise timely delivery. Materials need to ready for your trades so as not to hold them up, but should not arrive too early and hang around, getting in way or worse still get stolen.

By the way…

Once a year at my annual Property Renovations and Development Workshop I give you the blueprint that I have used for successfully building a multi-million dollar property portfolio through renovations and development. 
development plans

This is a training event – there is nothing to sell the back of the room- no expensive courses and definitely no properties for sale.

Click here now and get all the details, reserve your spot and join me on October 20th and 21st – only  a short while left! 

6. Determine the order of the trades and service providers

This will depend on the nature of your renovation project, and some trades will overlap (work simultaneously) but the workflow could look something like the following:-

  1. Architect, structural engineer — if structural work is needed
  2. Quantity surveyor for a scrapping schedule – a list of items which can be written off as immediate tax deductions when they’re scrapped.
  3. Builder
  4. Labourer — empty, demolish, pull out old kitchen, appliances.
  5. Plumber, electrician  to disconnect services
  6. WorkersCabinet maker — there is a time lag for the new cabinetry to be built
  7. Electrician, plumber, Plasterer
  8. Painter
  9. Cabinet maker install new cabinets
  10. Tiler
  11. Painter final touch ups
  12. Carpet layer
  13. Landscaper
  14. Building surveyor to certify structural work
  15. Quantity surveyor for a new depreciation schedule.

7. Regular site visits —

It will be your job to:

  1. Check that trades are in attendance
  2. The work is being done professionally and to.
  3. Troubleshoot

8. Site Clean up

9. Lease, Refinance, go again

This is also the time to review your renovation against your initial budget and goals.

Learn and look for the best ways to profit from your development.

Renovating could make you a lot of money, but there are potential dangers for the unwary. These include:

1. Rushing in to a project with only marginal profit

It’s not easy to find a project that stacks up and delivers a good profit margin.

But don’t rush in…there’s no point buying a property that’s only going to deliver a small profit margin or, even worse, lose you money.

Bad House2. Assuming that buying a cheap property will automatically make a good renovation profit

Cheap houses are usually that way for a reason.

And that’s often because of things you can’t change though renovations — it could be the location of the property or a poor floor plan or the wrong type of property for the  prevailing demographic.

There are always real estate bargains to be found, but make sure you’re buying a bargain and not a lemon.

3. Not understanding the area in which you want to renovate

Every suburb has streets that are more sought after and areas that are considered not so desirable.

Each location will have a price ceiling and adding more to your renovation costs may lead to overcapitalisation.

Understanding the subtleties of your target suburbs and the values of properties in the area will help you know when you’ve spotted a good renoavation opportunity.

Overcapitalising4. Overcapitalising

This is by far the most common trap for renovators when they spends more money than they could legitimately recoup in added value.

You can see how easy this is to do: you get excited by the renovation process, splurge a whole heap of money on fixtures and extras, and before you know it you have blown your budget.

I also see it a lot with second-tier properties where adding more expensive items doesn’t always add value.

5. Doing it cheaply

Occasionally I will walk through a home and ask myself, ‘What was the owner thinking?’

The fixtures are cheap, the cabinets are cheap, and the painting is shoddy and obviously a DIY job.

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Prospective tenants or purchasers will notice these things, so even if you are happy to live with inferior paintwork or cheap fixtures, this does not mean others will.

You need to know understand what level of ‘product’ is in demand in the area and deliver that.

You don’t need to install a commercial kitchen or the latest Bosh appliances to appeal to buyers, either, unless of course you have a generous budget and in which case, the sky is the limit.

But if, like most people, you are on a budget, always try and ensure that you buy quality appliances.

They need not be the most expensive, but try and avoid the cheap and nasty.

6. Not planning and costing your renovation before you start

You would be surprised by how many people, many of them extremely competent in their professional lives, don’t draw up a budget for their renovation.

This is of the utmost importance, especially if you are undertaking the project yourself.

Cost your labour and your materials first and then add them to the spreadsheet.

PlanningAlso factor in costs such as building delays and time spent away from work due to the renovations.

Make sure you add a buffer, too, for the unexpected.

If you are not an experienced renovator and you have a budget for $50,000, I would add $15,000 to that as a buffer because unforeseen things always come up.

7. Not factoring in the costs of getting buying and selling a property

Buying and selling property has significant costs attached and that’s why property flips (buy, renovate and sell) don’t work.

Inexperienced renovators often find that all their planned profits have been eaten up in stamp duty, tax and selling agents’ fees.

You need to allow roughly 5% of the property’s purchase price for buying costs.

When you sell, most agents charge a commission that is about 2% of the value of the property, as well as marketing costs.

And then you’ll pay tax on any profits.

That’s why I recommend my BRRRR strategy.

8. Not factoring in the value of your time

Managing a renovation project takes more time than you probably imagine and this has to be factored into your budgets.

Time ValueThat’s why, in general, I recommend you act as the project manager rather than as a tradesperson.

If you think you have loads of free time and spending your weekends and evenings renovating sounds like fun, then go knock yourself out.

DIY renovating means you need to live nearby.

You also need handyman skills or a keen attitude to learn

For the renovation to be profitable,  it must earn you more dollars for your time than another a part-time job would bring in.

It needs to earn you a lot more dollars in fact.

That’s because your part-time job doesn’t have a risk of failure like the reno does.

But beware…doing it yourself, is likely to end up taking longer and costing you more then allowing a builder to project manage your job.

Again, the aim of the renovation is to make you money, it’s not for you to have fun (even though that’s a good by product), but if you looking to have fun or excitement go trail bike riding or bungee jumping.

Don’t take a financial risk of a DIY renovation project.

If you want to take your property investment to the next level, please join me at my annual Property Renovations and Development Workshop I give you the blueprint that I have used for successfully building a multi-million dollar property portfolio through renovations and development. 
development plans

This is a training event – there is nothing to sell the back of the room- no expensive courses and definitely no properties for sale.

Click here now and get all the details, reserve your spot and join me on October 20th and 21st – only  a short while left! 

 

TOP 5 RENO BUDGET KILLERSTOP 5 RENO BUDGET KILLERS

1. Not doing a realistic feasibility and budget prior to purchase

It’s interesting how this message keeps repeating itself.

If you’re a beginner avoid properties that require big reno and avoid properties that will require you to spend money on things such as fencing, stormwater or rewiring as they can be costly, time-consuming, and don’t give you the visual ‘bang for your buck’ that you’re looking for.

Instead look for properties that can be fixed quickly and cheaply.

Pests Inspection2. Structural problems:

These may require a lot of work and , often hidden from sight, and therefore they don’t add much perceived value at the end of your project.

One way of minimising this risk is to have a building and pest inspection conducted prior to purchasing your property.

Many older homes have foundation problems including rising damp and repairing these could cost you an arm and a leg.

3. Extensive mould:

Damage to the damp course on top of the foundations or ongoing leaks or poor drainage can result in mould inside the walls.

This rising damp causes mould on the walls and the musty smells in the house.

Depending on the damage, this can often be expensive.

Electrical4. Electrical faults:

Many old houses have problems with their electrical wiring systems.

If it’s necessary to rewire the house, the cost will likely eat into your profit.

But while it’s expensive, future tenants or prospective buyers expect the electricity to work as a standard, so the fact that the house is newly wired does little to impress them.

5. Termites:

Termites can eat a house from the inside out.

Since they are usually eating structural parts of the house, the bill for removal and repair is usually in the thousands.

Again this is something you should look for in a building and pest inspection.

If you want to take your property investment to the next level, please join me at my annual Property Renovations and Development Workshop I give you the blueprint that I have used for successfully building a multi-million dollar property portfolio through renovations and development. 
development plans

This is a training event – there is nothing to sell the back of the room- no expensive courses and definitely no properties for sale.

Click here now and get all the details, reserve your spot and join me on October 20th and 21st – only  a short while left!

HOW TO FINANCE YOUR RENOVATIONHOW TO FINANCE YOUR RENOVATION

Funding a basic cosmetic renovation project

If you already have equity in your own property, you can take out an investment loan for the whole amount of funding, including the deposit, buying costs and renovation, from your own equity plus the value of the new property.

Alternatively, if you already own the property you’re looking to renovate, you can take out the required funds for the renovation from the equity you may have in that property.

There are two ways to do this.

The first way is to cross-collateralise the two securities and take out one big loan to cover all funding.

The second is to use a line of credit.

Collateral To Borrow To Buy And Renovate A New Property1. Cross-collateralisation

This is when you use another property as collateral to borrow to buy and renovate a new property.

This means you have now tied up two properties together.

Many investors avoid this strategy because of a few downsides, including borrowing limits and the lack of flexibility down the line.

2. Line of credit

The second option is to use a line of credit against your home to cover a 20% deposit plus all purchase costs and the renovation costs.

You then raise a stand-alone facility at 80% against the investment property.

The second is generally a better option if you’re looking to sell the property and move on to another renovation project.

The line of credit against your home will be retained for the next one, and going forward all you will need to do is raise 80% lends against the new purchase.

This avoids the cost of lenders mortgage insurance, which can be significant and eat your profits.

How to finance your renovation project

Lending for renovations has become a little tougher of late.

Finance Your Renovation ProjectIf it’s a major renovation, most lenders will want a fixed-price contract from a licensed builder.

They will only lend on a completion valuation, so you will need to have all your costings done up front.

If you already have equity in your home or another investment property, you could take out an investment loan for the whole cost of the renovation.

And if you’re buying a property for renovation, you would normally fund this purchase using your equity in an existing property.

Alternatively, if you already own the property you are looking to renovate, you could take out the required funds for the renovation from the equity you may already have in the property — possibly through a line of credit.

You will need to have significant equity in the property or another property as lenders will not allow the overall funding to go above 80%.

What can you do to stay ahead?

As signs point to softer growth conditions for Australian property over the coming months, independent professional advice and careful consideration will be as important as ever in navigating Australia’s varied market conditions.

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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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Your Complete Guide to Renovating for Profit' have 2 comments

  1. Avatar for Property Update

    October 11, 2018 Kevin

    Hi Michael, I enjoyed reading this. Being nitpicky, though, I think the content needed a bit more proof-reading. Typos and the like stick out to me like they are painted in red paint. Also, you say to allow up to 20% contingency in the earlier part of the article if you’re inexperienced, then later on as a specific example you say to allow $15K contingency for a $50K budget, which is 30%…

    Reply

    • Avatar for Property Update

      October 11, 2018 Michael Yardney

      Kevin – I’m glad you enjoyed reading the article and you’re correct – spelling is not my strongest quality.
      Luckily the good information makes up for it

      Reply


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