Renovating for cash, the four keys. 15/10/12

One of the most common strategies for making a quick dollar or adding instant equity to a property is to do a renovation. It makes sense to freshen the place up and make it way more presentable for a future purchaser or tenant. There are a few issues with this type of property strategy though and it can come unstuck pretty quickly. A lot of times prospective millionaires find that by the end of the renovation they have over capitalised or under budgeted and as a result the cash cow property is now a money pit. There are four keys to doing it right, follow them and you reduce the chances of spending more than you should, or more importantly more than you have.

The purchase: As a rule of thumb, a renovated property should be worth its initial purchase price plus one and a half times what you spend on the renovation when it’s finished. So for example if you spend $300,000 on a property and do a $30,000 renovation, the property should be worth approximately $345,000. That’s how you add equity.
With this in mind get to know the price of things in the area that you are buying, and if you target a property that is a little run down or in need of a $30,000 renovation, then ideally you need to buy it at approximately $45,000 under the market value for a new or freshly renovated property of equivalent size and location.

As simple as this sounds, people get caught up in the renovation buzz, and competition for “renovator’s delights” in the market can lead to competition and we all know competition leads to higher prices. So as with any property strategy, make sure you make your money when you buy by purchasing at the right price for your strategy.

Planning: Don’t buy it and walk in with a sledge hammer like they do on T.V. I would struggle to count the amount of times I have seen people destroy things during a renovation only to replace them with expensive replicas or inferior products. It’s about knowing what needs to be done, and planning when it needs to be done.
The internet is a great source for this information, however I would suggest professionals for some of the bigger jobs like plumbing and wiring. Ask these guys and girls for time lines and access requirements when you are asking them how much. It’s more about convenience and simplicity for them than it is about money. To them time is money and if they can get the job completed quicker it costs you less. They will also tell you what has to be done as opposed to you guessing what needs to be.

The most important thing about a plan is it gives you a budget that you can control. Expect the unexpected in a renovation though. However, without a well laid out plan everything is unexpected and it’s the surprises that cost you money.

Spend it where you can see it: If I only had so much money to spend, and was faced with the choice of using the greatest acoustic grade plaster board and the highest grade over engineered internal wall frames OR installing a 900mm oven and hotplate, the kitchen appliances win hands down!.
Renters or buyers walk in and expect to be wowed on the spot. They are wowed by what they see, not by a spec sheet. I have seen people spend tens of thousands of dollars to wire roof tiles down so they are cyclone proof and then skimp on the flooring by using a cheap laminated lithograph instead of hardwood flooring.

Think logically people, it’s the things you see and smell that constitute first impressions in a property, and first impressions count. Light and bright paint work, new carpets, 900mm appliances, glass or shiny modern splashbacks, modern and different tap fittings, funky doorhandles on doors. These are all things you see when you walk in. They don’t need to be the best brand name in the business or the most expensive, but they do need to have little bling and impact.

Don’t ignore the safety issues with wiring and framing though. Just don’t overspend where you don’t need to. Remember if you do a renovation and then sell within approx 7 years, you are still liable for structural warranties just as a builder would be. Do the renovations to code, always.

Style: this one is subjective, so treat it as such. Neutral tones are the go. Something relatively modern, but not way out there. Look to renovate with the 75% target in mind. If 75% of people that walk through don’t mind the renovation, then you are on the right track.
Green walls, white shagpile carpet, leopard skin curtains and the like may win awards in magazines that cater to a demographic that lists its members in the single digits, but it won’t add value for the masses.

Don’t make it a love or hate renovation, make it one where, for the most part, people thing its “nice”.

The renovation strategy to add value is really a great way to get some extra money by thinking a little outside of the box. It also makes renting a place out when it’s finished a lot easier. Not to mention how well the depreciation schedule comes up after having a quantity survey done. Speak to your accountant about deductions and they will tell you it’s a great way to go. Just make sure you follow point one to letter of the law. You need to buy it right in order to make money by the end of it. As always negotiate hard, but fair. Have fun and buy well.

Garry McPherson

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