You might have been following the reality show ‘The Block’ in which the participants renovate the old properties and some of them make decent profits in a very short time frame. Is it renovation as easy as it looks? We will explore both sides of the renovation this week.
As seen earlier with the strategy of buying old properties, there are many advantages to renovating. The main advantage is the ability to create instant equity that you can access for further investment or to create an equity “buffer” to manage your risk better. Spending money on a renovation if done right is a very efficient use of your money.
Renovations do not have to be major to be add instant value. Cosmetic renovations have lower town planning requirements and do not carry the risk inherent in building a brand new property. They can be as simple as a new kitchen or bathroom, fresh paint and floor coverings.
This increased value could also generate a higher rental return, not just creating more equity. It can also lead to higher tax advantages due to higher building deprecation.
Sometimes you can buy properties under market value that need renovation. However, these properties in recent times are highly sought after and so competing parties frequently bit this benefit away.
Another positive is that if you are purchasing these types of properties, most of the money you pay is going into the ‘land component’, which appreciates while the building on the land depreciates over time. Therefore, with a higher land component you are ensuring solid future growth.
Firstly, sourcing the right property for renovation is a time-consuming exercise and same as developing a new product, you will have to do your homework to understand what features/improvements will attract potential homebuyers and/or tenants in the target area/market. E.g., features that are more stylish are more likely to attract buyers in areas such as inner city suburbs where people are prepared to pay a bit more for the life style.
Inexperience could cost you more money if you do not anticipate issues with structural, engineering or council permits. You may not see trouble spots until half way through a renovation (electrical, plumbing or structural issues). It is very easy to underestimate the time, cost and work involved in a renovation.
In addition, you would have to ensure that the money spent is going to give you the increased value in the property and that you have not ‘over-capitalised’. You have to ask yourself, will you be able to create enough equity on the sale ore revaluation to make it worth our investment in time and money? Can you increase the rent sufficiently in the area to make the exercise worthwhile?
Last but not least, renovation requires a lot of work if you do it yourself. Even if you outsource it, it requires a lot of management if done by others and your profit margin will reduce significantly as result.