Creating wealth in a property through renovation is a subject that’s near and dear to most investor’s hearts.
It was a pleasure to welcome renovation queen, Cherie Barber into our Real Estate Talk conversation.
Here’s the transcript:
Kevin: Hi Cherie, how are you?
Cherie: I’m fantastic. Thank you, Kevin.
Kevin: Cherie, I’m constantly asked if it is possible to instantly improve the equity in a property through renovation.
How do you do it while making sure that you don’t overcapitalize?
Cherie: First thing, most renovators, most people across the country, who have never renovated anything, the best place to start is doing a quick cosmetic renovation.
It’s very hard for somebody to stuff up a cosmetic renovation.
A structural renovation yes, you can make some costly exercises, but the key thing to make sure is you don’t overcapitalize is to make sure that you stick to the formulas of renovating.
When you’re doing a quick cosmetic renovation, a general rule of thumb is 10% of your property value.
So if you buy a house at $400,000 for example, your cosmetic renovation should be 10% of that, which is $40,000 and not a dollar more.
Kevin: What about opening up a property on the inside? Is that a good idea, to create more space, Cherie?
Cherie: Yeah, definitely. A couple years ago I sat down with a bank valuer and I said to him, “What really adds value and what doesn’t add value?”
We all know as renovators you can make stacks of changes.
There are about 150 changes I teach at my workshop on how you can add value, but some of them don’t add monetary value.
Some of them add more emotional value and some do add real tangible value, according to the bank valuer.
One of the things that the bank valuer sat down and discussed with me is actually the layout of a house.
I quite often take out walls within an old property because a lot of the architecture from the 60’s, 70’s and 80’s, which is a great period of property age to buy for cosmetic renovations, it is all about segregation where they have lots of little rooms within a property.
The problem is times have changed and we’ve gravitated more towards open plan living, dining, and kitchen areas.
So almost by default renovators will need to remove typically one or two walls within a property when doing a cosmetic renovation.
Yes, that it a structural change, but for the purposes of cosmetic renovations, you’re still doing that under cosmetic work even though technically it is a structural change that you may or may not need council approval for.
Kevin: When you look at a property that’s going to be primed for renovation, particularly cosmetic renovation, what are some of the key things you look for Cherie?
Cherie: The first thing is to look for a property that is structurally sound, but cosmetically tired.
When you buy a property, typically the age of the property is quite important.
I typically say to my students you want to be targeting properties that are at least 20 years old but no more than 40-50 years old.
Obviously as the days and the years rolls by, a property becomes more decrepit and decrepit.
Then you start pushing yourself into the structural renovations territory which is complete kettle of fish.
Definitely the age of the property and making sure it is structurally sound.
You want to avoid some of the big cost items like termite damage.
Roof replacement does not add any value according to the bank valuer.
However, it’s a widely expensive change.
Most roofs are going to be in the order of $20,000 to $40,000 all said and done for materials and labor.
You’re never going to get that profit margin back as a cosmetic renovator.
Things like rising damp, asbestos are all big ticket items.
It’s fine to buy a property with those things, but what you want to be factoring in the costs to rectify those things into your calculations before you buy.
Or better still, negotiating the price to rectify those works off the purchase price if you can.
Kevin: Oh, I like that last one: negotiating it off the price.
That’s probably the best way to make sure you’re not going to overcapitalize, if you don’t have to pay for those.
Cherie: Correct. And that’s what a lot of people do.
A lot of renovators will go to an open inspection and they’ll see a house and they’ll like it.
They’ll think, “Great! This could be my first deal potentially.”
Then they go and get a building inspection report done and they notice that there might be asbestos or there might be termite damage.
A lot of people freak out about those big ticket items.
What I say to my students is don’t freak out about them.
What a lot of home owners do is get scared about those things and they walk away from the property.
They leave opportunity on the table for somebody like me or my students to come in and solve those problems at a cost.
But as I said, ideally you don’t want those costs coming out of your pocket.
They want to be coming out of the person selling the property, the vendor.
Kevin: As always, Cherie, a delight talking to you. Thanks for your time.
Cherie: A pleasure. Thanks for having me, Kevin.
Listen to the full show at RealEstateTalk.com.au and while you’re there subscribe and receive our weekly podcast (or the transcripts) where I interview Australia’s leading property experts.
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