If an alien landed in Australia, it might think that we’re a nation of renovators.
Not only do we have a plethora of TV shows about renovating for profit, but there is an army of amateurs who spend their weekends becoming better acquainted with a paintbrush.
There is no doubt that buying a house to renovate can be the path to capital growth – as long as you select the right property to start off with.
Most people also need some sort of property development finance so they can complete the renovation.
Both of these factors require a level of understanding to ensure that you’re investing in the correct real estate as well as accessing the right finance.
What to look for when you’re buying a property to renovate
Renovating for profit can work, but it can also leave some novices with a bad taste in their mouths as well as holes their wallets if they choose the wrong property to begin with.
Buying a house to renovate requires an understanding of the local market, including recent sale prices of similar properties post-renovation.
One of the most common mistakes that new renovators make is they over-capitalise.
That means that they don’t stick to their project budget – or even create one – and spend far more on the property than it could return to them anytime soon.
An example could be buying a property for $500,000 and then spending $75,000 on the renovation when the top price for a similar property in the area is $525,000.
Time might heal that price divide, but most renovators need to repay the cost of renovation via their property development finance sooner rather than later, so they probably can’t wait for a market upswing that may happen later rather than sooner.
The difference between house flipping and property development
This can work in theory, however many beginning renovators fail to include an array of buying and selling costs into their feasibility analysis (if they do one at all) which eats into their profits.
As well as the cost of renovation, there are expenses such as stamp duty and legal costs when you buy, then there are selling costs such as commission and legal costs (again) when you sell.
Let’s consider a $500,000 property again.
Depending in which state the property is located, these additional expenses could be about $35,000 – on top of the cost of renovation!
Plus, there are holding costs during the renovation as well, which can add about another $15,000.
So, before you know it, the “profit” has been reduced by $50,000, which likely makes the exercise not an overly lucrative one after all.
Property development – while a more advanced strategy – usually involves holding a proportion of the new properties, which secures the profit, and ensures continued capital growth in the years ahead.
Of course, both options probably require some form of property development finance, which can result in a smoother ride – as long as you access the right advice at the outset.
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