The appeal of the home renovation is pretty straight forward; you buy low in the market, add a few extra touches and sell or rent out the property for a neat profit.
It’s a simple plan and according to Patrick Bright, Buyer’s Agent and author of The Insider’s Guide to Renovating for Profit, it’s one of the sure ways to manufacture both capital growth and cash flow.
“With property renovation, you’re in the driver’s seat. Rather than just sitting back and waiting for the market to deliver capital growth over time, you have the opportunity to accelerate the process by manufacturing capital growth.”
However you need to be careful and do you research, renovating isn’t for everyone. Fortunes have been lost in the reno game and it’s not as simple as knowing which new colour scheme will suite the lounge room.
Bright says “What really matters is if how well you can spot an opportunity and if you’ve done enough research to forecast your profit margin correctly.”
You need to develop your eye for knowing what a renovated property will sell for in its market. Treading lightly in the research and planning phase can lead you to overcapitalising and making a loss.
Selecting the location
Just like an unrenovated investment, you want to be looking for a property that is in a good area. The same old basics apply: a property that is close to schools and shops, has good road infrastructure and excellent access to public transport.
Essentially you want to be looking for a property that is in demand, regardless of its need for renovation.
“In many ways, your location will determine your selling price,” says Rebecca Yarrow, a renovation expert from Capital 360. “You need to look for an area that shows good growth potential, having an idea of what good properties sell for in that area.”
You want to avoid properties with unappealing features that can’t be changed with a renovation, such as being next to a freeway.
Something to keep in mind is to buy the worst house in the best street. This will give you the widest scope for making a return.
Bright says that spotting a property with good renovations potential comes down to a simple question. “You’ve got to ask yourself this: what do you want? You want to get better than average growth and better than average returns. That means your first step will be finding out where you could get this.”
Selecting the property
Once you find your suburbs, you need to look for which types of properties are likely to outperform the market—houses, unites or terraces. After this you can prioritise finding a property that is best suited to a renovation, without you overcapitalising.
How you do this is just a numbers game. Bright says you need to start with the end in mind, what will you be able to sell the property for when it’s renovated? Then you can subtract the original purchase price, renovation costs, holding costs and you’re left with your profit margin.
“For any property you’re thinking about renovating, you need to be fully aware of how much work is needed, how much that work will cost and how much the renovated property will be worth on completion.”
Bright says you should allow these numbers to guide your renovation decisions and which property to buy.
A good way to research is spending at least 12 weeks attending open house inspections. Cherrie Barber, director of Renovating for Profit suggests aiming to look at about 100 properties or about eight to nine properties a week.
“It requires a lot of self-discipline, but it’s one of the best ways to get a feel for what good and bad prices are.”
Properties with obvious defects or don’t meet current tastes and fashion are worth having a look at. Some of these can be renovated without needing to knock down any walls and still coming out ahead. Archicentre’s Victorian state manager, David Hallet says that houses that don’t have the style of ‘open-living’ are generally worth investigating.
“If you can find a house that’s been well-built but badly renovated, you can often find that by reorganising the walls and windows within the fabric of the building, you can actually get a 21st century home at an affordable cost.” He says.
Measuring the property up
Once you’ve got a property in your sights, it’s time to focus the lens and make sure you’re getting exactly what you think you’re paying for. Before signing a contract you want to have a number of inspections done. This could save you a bundle down the line.
The two most crucial inspections are the building and pest inspections. “If it turns out the house has a termite problem, quantifying the cost and extent of the repairs required upfront will be difficult, so it’s essential that you get the inspection done,” says Yarrow.
The building inspect could reveal major structural problems, in which case it’s best to leave it alone. “When you’re starting out as a renovator, it’s best to stick to renovations that are not structural. Depending on what you plan to do, these projects are expensive. They also often require council approval and there’s the risk of not getting those through in time.”
A good way to be thorough and methodical is by writing a renovation checklist of all the things to look at, says Judith Taylor of Property Women. These could include guttering and floorboards, and wiring and plumbing, especially if it’s an older house.
Even after ticking all the right boxes on your list, she recommends adding 10% to your estimated reno budget for any unexpected costs.
If you’re renovating an apartment you’ll need the building’s strata report and double check what the conditions are for renovation. You want to be sure there aren’t any strict limitations on what you can do. Taylor suggests to be wary of a complex that has an above average amount of maintenance being done and be sure to do further investigations.
Getting the best price
Just like when you’re buying a non-reno investment property, one of the central rules for decent profits is that you buy well. Your ability to negotiate with dealers and agents will help you get the best price.
One important piece of information is finding the vendor’s motivation for selling. This will determine how flexible they are on moving from their asking price and how likely it is for you to get a better deal.
Bright says the asking price is almost irrelevant as it’s usually an optimistic figure the vendor would like to receive or an inflated figure the selling agent told them they could achieve in order to win the contract.
Another point to consider is making an offer on the basis of getting access to the property during the settlement period.
This will give you the time and space to conduct the important property inspections and lay the groundwork needed for your renovations.
As a way to reduce holding costs, Bright suggests to start the renovations the day after settlement. Just be sure to have all your quotes locked in before the keys are handed over.
Managing the reno
Once the property is in your hands you’ve come to the steepest hill. But before you start ripping out the kitchen top it’s best to decide who will be managing the whole project.
Many people take it on themselves without realising how time consuming it can be and what is really in store for them. Yarrow suggests hiring a project manager so you can make all the creative decisions and leave the daily bits and pieces to someone more experienced.
Ultimately the success of the project will depend on good preparation, which means planning for contingencies and keeping track of the renovation progress everyday. It’s good practice to keep and file every transaction and piece of paper you use to track time and every dollar spent.
A good way to keep the costs down is to play each supplier against the other. Barber suggests always getting three to five quotes for any part of the project over $1,000.
“Most people get one or two quotes from tradespeople, but then they have no benchmark to measure them with. It’s rare that all five quotes will be way out prices, and once you have a couple of quotes, you can bounce each tradesman’s prices off the other to negotiate a better deal.” She says.
However the most important factor in whole the project is sticking to the budget. Barber says it’s vital to be prudent down to the last dollar.
“Most people get to the end of a project and realise they’ve spent $70,000 when they only intended to spend $40,000. That’s why it’s necessary to constantly track your expenses. If you realise you’ve gone over budget one week, negotiate extra hard with tradespeople and suppliers the next week to get that money back. Every dollar you save is a dollar you earn.”
Another good cost saver is finding a single place for all your materials. Once you’ve shopped around first, finding a single supplier allows you to negotiate bulk discounts.
“Get a number of quotes, and like you would with tradespeople, bounce those quotes off each supplier. Tell them you need to buy in a hurry: ‘your competitor has given me this price – what can you give me?’” she says.
One of her favourite methods is negotiating over the phone. Once you’ve been into the store, selected your brands and models and have your shopping list, speak to the supplier over the phone. In her experience the suppliers are more to the point.
“In the store, they like to size you up to see what prices they can get away with – on the phone they know that you’re only after the best price. This makes haggling a lot easier.”
by Your Investment Property Magazine
No comments:
Post a Comment