Renovating a property can be a great way to create value and drive capital growth, but it's not as simple as many people think.
In today's market, where property values are not expected to grow strongly for some time, many investors are turning to renovations as a way to manufacture capital growth.
However, there are a lot of potential pitfalls that investors need to be aware of before jumping in.
And that's what I'm going to discuss in today's show with Greg Hankinson, director of Metropole Constructions, and a veteran builder who's undertaken hundreds and hundreds of renovations
Long before I got involved in property development, I cut my teeth on renovations, and I'm still actively renovating the properties in our portfolio, so I'm looking forward to having a chat with Greg and sharing some of my experiences, too.
The Block was once again a hugely popular TV show, and not surprisingly, each year, 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.
- Why are you doing it?
- Are you improving your home to enhance its liveability, are you wanting to bring your investment property after days, or are you considering flipping?
- Do you have the necessary knowledge?
- How much time can you spare?
- What is your time worth? Consider employing a registered builder.
- Are you able to find the right people for the job?
- Have you got the right finance in place?
- Buy, Renovate, rent, refinance, repeat
- Flips flop
- You need to manufacture significant capital growth - upside to cover the costs, and unless you do a structural renovation, this is too hard to achieve – can’t achieve with cosmetic renovation.
- The required permits and the associated costs could easily add 50% to your renovation budget.
- With cosmetic renovations, you can’t really get two dollars for every dollar you spend
- Why they flop - Transaction and holding costs, tax, unrealistic expectations, and flipping in a fickle market
Which tasks to outsource
- Anyone can renovate, but that doesn’t mean they can make a profit, so let’s look at some tips to make your renovations more profitable.
- What needs licenses – the electrician, plumber, any building works over 5000 in Victoria and different in other states
- Hire a project manager don’t do the work yourself.
- Choosing the wrong location
- You need the right market location where there is a significant differential value if you renovate.
- This is unlikely in cheaper blue-collar or regional areas.
- Wrong Property
- Cosmetic renovations – must be 20+ years old and of significant value; a lick of paint is not enough
- Structural – probably 50+ years old – an old style now ensuite etc, must have good bones
- Refurbish versus renovate
- What’s the difference?
- Refurbishment has no direct equity creation and no additional capital growth, but it does increase the rental returns and possibly some depreciation benefits
- Not getting the appropriate permissions
- Check the permissions required.
- Council & building permits? Owners corporation?
- Avoid overcapitalizing
- It’s very easy to find a property that needs a renovation, but not so easy to find one that will reap a profit.
- Not allowing a sufficient contingency amount
- Once a budget is established, allow a contingency based on your experience level and the extent of the renovation works. Allow a little more if structural works or there are planning/building approvals required and a little less if the works are purely cosmetic.
- Ballooning budget
Unreliable tradesmen, deadlines slipping through your fingers like sand, and alterations to the plan can quickly add up to cause your renovation budget to blow. Planning for delays and allowing for contingencies is critical to a successful renovation.
- Unexpected and Invisible costs
- From finding asbestos to hitting hard stones when excavating, these are just some of the unexpected costs that can come out of the woodwork when your renovation begins. These additional costs burn into your wallet but removing the issues does not add perceived value to the property.
- Tailor the renovation for the target market
- Becoming an expert in the area.
- Understand local demographics
- First impressions matter
- The wow factor.
- Natural light, fresh paint, new floor coverings, and window furnishings go a long way toward transforming a tired old property into something that will be sought after.
- Don’t waste money rewiring or replumbing (OK for structural).
- Make people think you’ve spent more money that you have.
- Kitchens and bathrooms sell properties
- Beware diluting your dollar by doing half the job FALSE ECONOMY.
- If you renovate the kitchen but leave the original tired and rundown bathroom, it will devalue the kitchen and vice versa.
10. Avoid DIY
- Unless you’re a skilled tradesperson, don't get lured into to misconception that you'll save money by doing the work yourself.
- TV shows like The Block glamorize and simplify the renovation process.
11. Remove the emotion
- Adding value to an investment property should be run like a business.
- There's no room for the latest fad in design, and you shouldn't be trying to make the cover of Belle magazine; that's for your own home.
- Get a good team around you
- Renovation involves coordinating various tradespeople.
- They've done it before and probably seen the mistakes others have made.
- Don’t be stingy
- Stretch – you normally get only one chance per property every 20 years - do it right - don’t be cheap
- Thrifty is good, cheap is bad
- There are a lot of cheap products in the marketplace these days, especially online. In my experience, cheap stuff is cheap for a reason and will cost you more in the long term.
- Cheap just doesn't last, and it's a false economy to suggest otherwise.
Ask yourself the tough questions
- "Do I have time to execute this renovation effectively?"
- If the answer to this is "No" or "I think so?" Consider paying a professional to manage it for you.
Links and Resources
Fin our more about Metropole Constructions
Join us at Wealth Retreat 2023 on the Gold Coast in 2023– express your interest here
Get a bundle of eBooks and reports – www.PodcastBonus.com.au
Some of our favourite quotes from the show:
“I think the other thing you’ve really got to be honest about is your abilities.” – Michael Yardney
“I guess it’s really easy to find a property that needs renovation, but it’s not that easy to find one where there’s a profit at the end of the job.” – Michael Yardney
“This is the stage of the cycle that adding value through renovations or development makes sense, but don’t try and do it on your own.” – Michael Yardney
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