Why Renovating is Not Always About Profit

I am sure you have seen the TV shows?

So easy, to transform an entire house from top to bottom in less than an hour, while making thousands of dollars in the process!

Repair RenovateAll you need is a top team of tradies, preferably someone in short shorts and a cute puppy dog.

Before you know it, you could be flipping your way to thousands in profit!

But in reality, it is very different, particularly in Australia with our Tax laws.

This type of strategy is also very different to building long term, sustainable wealth.

If you are looking to build your wealth faster, property has a mechanism built-in to fast track the process.

The ability to Add Value, something you cannot do with any other asset.

I have previously called it the ace up your sleeve for investors.

Here are my thoughts;

Case Study:

To whet your appetite, I wanted to share a recent Case Study, highlighting how we assisted our clients recently, here in Brisbane.

Their brief was to find them a “renovators delight” in a high demand, investment grade suburb.

As you can see, we certainly did that!

Case Study 1

Case Study 2

Because this was not to buy and sell, but to hold and focus on longer term wealth, they were able to renovate accordingly.

They could renovate and spend a little more to upgrade it to a “owner occupier” standard, they didn’t have to scrimp and save and cut corners to make a profit.

The property has now become a set and forget inside their portfolio for the next 20+ years to create a higher level of wealth for them

Not Always About Profit

Profit can be both the most important factor and the least important factor when deciding to undertake a renovation.

Obviously, you would want to make a profit otherwise the exercise would be pointless.

But when you are focussing on making a profit, your target is to sell and make “$X”, that is where you run into trouble.

I often hear people say you need to make $2 for every $1 spent.

While that would be fantastic, it should not the primary focus, particularly if you are looking to build long term wealth

So, what is?

Case Study 3

Case Study 4

Widen Your Asset Base

For the vast majority of investors, widening your asset base needs to be your primary focus.

So rather than focussing on a $30,000 or $50,000+ profit, you should undertake a renovation to fast track your wealth and achieve you goals faster.

So, the biggest benefit is clearly increasing the value of the asset, but there are many more.

Some of the other benefits will include;

  • Additional Equity

A boost of additional equity may assist you to get into your next property quicker.

Rather than relying on the market to do the heavy lifting, a renovation could assist you to manufacture more equity faster.

  • Boosting Cashflow

Even for some of the smaller renovations and upgrades we have undertaken for clients, there has been a boost in cashflow in terms of increased rent.

Under the new tax laws, the cost of the renovation could also have depreciation benefits.

Therefor an increase in rent and depreciation benefits, will quite often boost the coffers or decrease the cashflow gap and increase serviceability.

  • Lower Expenses

An old, tired and run-down property will require a higher level of maintenance and outlays, while an updated and new property will not.

  • Appeal

Naturally, there is something special about living in a nice, new, fresh space and it is the same for perspective tenants as it would be for buyers.

These types of properties can have high demand resulting in superior returns.

Case Study 5

Case Study 6

Investing in a Renovation

If you had $50,000 or $80,000 in a term deposit or savings account, or even in an offset account, it may not be working hard enough for you.

The best result would obviously be another investment grade property.

But a close second may be to invest it into a simple, cosmetic renovation.

With savings rates anywhere between 0.001% and 1%p.a., investing in a renovation, in a high growth location may see returns of up to 5% – 7%p.a. plus, over the next decade or two.

This will have your savings working much harder for you over the longer term.

Summary

There is something rather “romantic” about transforming a rundown old property into a modern and stylish home.

Renovation House

And don’t these case study photos look amazing!

But our clients did not set out to renovate initially with the aim of flipping for profit, this was an ace up their sleeve.

This was part of a longer-term wealth strategy that will enable them to increase their wealth faster with a view to widening their asset base.

It enabled them to take their time and focus on quality and renovating to a higher standard.

They boosted their cashflow through superior rental returns and depreciation benefits and reduced maintenance costs associated with older homes.

It is also a boost for serviceability, which all investors struggle with.

And I know for a fact they had tenants lined up out the door to rent the property, even in this market.

A renovation can be a great investment in itself, as you will struggle to get better returns in any other market at this unprecedented time.

To find out if this could work for your property, our team at Metropole would be a great place to start.

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Brett Warren

About

Brett Warren is Director of Metropole Properties Brisbane and uses his 13 plus years property investment experience to advise clients how to grow, protect and pass on their build their wealth through property. Visit: www.brisbanebuyersagent.com.au


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