Experts - What would you start with in the reno game?

[vaughan]

new value of $220k, which is $50k profit

No it's not. You haven't considered all the costs, and I'm not sure that your assumptions about improved rent and property prices are realistic. You really have to study the area to work out what the market values are.

The capital gains tax alone could be 30% of that $50k, which is $15k. (This could be halved if you keep the property for 12 months but your holding costs will be greater.) The cost to sell is around $5k. The holding costs for 6 months worth of interest on $170k loan is around $5,000. So that profit is halved to $25k.

I cannot work out whether you're trying to improve the yield for a buy and hold, or doing it to improve the value for a reno and flick. The rent of $230 per week is $12k which only covers the loan interest at 7%. You still have about $3,500 a year costs for property management ($1,000) council rates ($1,000) water ($500) and insurances ($1,000).

Do the sums again. Re-evaluate your strategy. Learn the numbers. Keep at it.

Don't just jump in and buy something because it's really easy to get a lousy investment that will cost you money.

 

[vaughan]

Advertised for $160k, current rental my guess about $170pw
Purchase for $150k, renovate $18k+$2k costs, total cost $170k

What it's advertised for is irrelevant.

Work backwards from your desired profits and expected expenses to work out what you need to pay it for to make the deal work.

Say you want to make $50k clear. To get this you really need to make $100k on the sale, just to cover the CGT, holding and selling costs. Money like this would be really difficult to make in an area with $300k median unless the property is fire damaged or something. However in an area with $600k median or more it might be more realistic.

You've got to make the numbers work...

Remember that the hardest part of buying well is finding a vendor who will sell at the price you want.

 

[Truly Exotic]

thanks vaughn and knightm,

vaughn I read your answers before you edited, i assume you edited to be more policitically correct no need to sugar coat anything for me id rather hear the truth,

What it's advertised for is irrelevant.

Remember that the hardest part of buying well is finding a vendor who will sell at the price you want.

absolutely, in the area im looking at (bendigo) in my experience, the asking price ranges are actually usually spot on, most properties get sold within that range or 1% of the lower price,

In this case, advertised for $150-$165k, I persoanlly think its worth about $155-$160k, so as a bad purchase price, I would say $150k, a really good one is $140-$145k, or a true bargain at $130k

The capital gains tax alone could be 30% of that $50k, which is $15k. (This could be halved if you keep the property for 12 months but your holding costs will be greater.) The cost to sell is around $5k. The holding costs for 6 months worth of interest on $170k loan is around $5,000. So that profit is halved to $25k.

I cannot work out whether you're trying to improve the yield for a buy and hold, or doing it to improve the value for a reno and flick. The rent of $230 per week is $12k which only covers the loan interest at 7%. You still have about $3,500 a year costs for property management ($1,000) council rates ($1,000) water ($500) and insurances ($1,000).[/QUOTE]

personally, I am very comfortable with moderate to high levels of risk but I try and look for a plan B or C, the way I see it, I am trying to a bit of both of "to improve the yield for a buy and hold, or doing it to improve the value for a reno and flick",

Scenario 1: so if I reno it, create good equity, and higher yields, for me a double bonus, I will keep, unless I need the cash for something,
Scenario 2: reno it, do a not so good job, costs expand, and I am left with $5k equity but higher rent, keep, still happy, (no different to buying an IP with good yield but ive worked my butt off for $5k extra)
Scenario 3:reno it, do a good job, rent reval doesnt go according to plan, now my property is negative cashflow, still happy, ride it out
Scenario 4: reno, rents don't rise, no new equity, then I cry and worry about the 100 other more important things that would be falling apart during the depression

Am I being completely moronic?

 

[vaughan]

personally, I am very comfortable with moderate to high levels of risk...

Yeah, a lot of people say that....

The forum is full of posts about people that bought at the top of the market in 2003 or 2007, often OTP and above market, almost certainly cf- and negatively geared, how they have held on for 5 or 10 years covering the exorbitant holding costs waiting for the capital growth to DOUBLE the property's value but it never came (or it came and went) and the property is now worth LESS than they bought it for, and the market is still declining in some areas and flat in most everywhere else. And they still have the privilege of paying the holding costs every month.

I often come out sounding negative but it's easy to buy yourself a money pit, and damed hard (and expensive) to get rid of it.

My wife and I are looking for cf+ properties and be damned if we can find more than one or two a year where the numbers actually work and the vendor accepts our offer. Other people post about buying 5 IPs in 6 months... I think they are just buying houses, not good investments.

 

[Andrew_A]

EV, perhaps building or borrowing a spreadsheet to work on your numbers could be helpful, plenty around. That way you will get some more targeted feedback on the numbers, important factors you can really control and that add value are you research into sale values and of course your buy price.

 

[travelbug]

My wife and I are looking for cf+ properties and be damned if we can find more than one or two a year where the numbers actually work and the vendor accepts our offer. Other people post about buying 5 IPs in 6 months... I think they are just buying houses, not good investments.

NAH!! I see properties all the time that I would have bought a few years ago ($20K equity + CF neutral after reno) but I'm REALLY fussy now. I won't buy anything unless it's CF+ with $40K equity (after reno).

 

[vaughan]

My wife and I are looking for cf+ properties and be damned if we can find more than one or two a year where the numbers actually work and the vendor accepts our offer. Other people post about buying 5 IPs in 6 months... I think they are just buying houses, not good investments.

NAH!! I see properties all the time that I would have bought a few years ago ($20K equity + CF neutral after reno) but I'm REALLY fussy now. I won't buy anything unless it's CF+ with $40K equity (after reno).

Errr, are you agreeing with me or disagreeing?

You've bought very well, especially your last... but that wasn't an "easy" reno and the gains were hard earned and not without risk.

 

[emptyvessel]

Thanks. We've only been seriously renovating for 2 years but have learned a great deal in that time.

When you find something post here if you need help with costing estimates and timeframes. Also order of works. The first thing we do is type a list of things we need to buy and type up an order of works with who will do what.

Great work on setting yourself some goals. Let the fun begin.

Thanks travelbug. We are working on some more medium to long-term financial analysis right now. Working backwards to determine if the time/risk of doing the reno's will actually help us reach our financial goals faster. Comparing to our current buy and hold method, that is. Not that the buy and hold isn't working, it is. I am just heavily exploring options available to bring some or all aspects of the goals forward.

 

[emptyvessel]

EV if I was in your shoes I would be contacting Nathan Birch, a fellow SS forumite, who is very successful at what you appear to be wanting to do.. he is a good bloke and will not rip you off.

Ta Rix. Yeah, I have been "circling" Nathan for about 12 months. Very highly regard him. Definitely has his systems worked out and contacts tuned. High on my list of folks to talk to.

 

[emptyvessel]

Hi EV,

Some great tips here already.

You don't mention if you have much property investing experience (other than to say you're a vanilla investor). My view is that if you don't get that right (ie buy the right house in the right suburb at the right price) then renovating and expecting a profit - particularly in this economy, is next to impossible. I have been designing/renovating for 20 years and I wouldn't dream of buying a house to reno in the current market without getting it considerably under market value. I know that is an obvious statement to make (buy well) - every investor knows they need to do that. But what does that mean for you and your strategy? You also need to know your exit strategy and this will have an influence on the choices you make when you buy and renovate.

I'm a big fan of property investing courses (if you can find one that is packed with content, has no ra ra and fits well within what you want to achieve). You can learn a lot from books, but it's much quicker to pack all that info into a weekend and then get on with it. I also think a mentor or coach is an invaluable person to have on board. When I first started out, I did a weekend course - absorbed all the info but then didn't do anything for 2 months. I then took on a coach (at a cost of $5k for the year or something) and went on to buy two more houses and a 2x block of units in that one year. I wouldn't never have had the guts or the knowledge to do that on my own.

So getting to the point - I think learn all you can about investing so you have a basic understanding and then pay someone to coach you through the process (you'll get a thorough understanding once you've done a few investments/reno's). Make sure they are experienced at renovating too so you can pick their brains not only about the property transactions but also the reno process.

Its great that you have a strict PM and financial discipline - very important!

And in answer to your questions (finally -sorry I have completely gone off topic!)...
1) Go for it - BUT buy well first. Renovate well, second.
2) Doesn't matter what you buy or where you buy as long as you buy under market value - AND if you are planning to sell or rent, you have plenty of buyers/renters looking for what you have on offer (ie know your target market)
3) Return? Pick a figure that you'd be happy to work for then add it into your feasibility study (some people will be happy with $20k. Others won't get out of bed for less than $100k). I'd suggest not aiming for zero return - how about a dollar figure such as ($30k) so you have your eye on the prize - and if it comes in less than that, at least you made a small amount of money for your efforts
4) Since you have a daytime job, I'd say you're better to get people in to do your reno for you (you just need to make sure this is factored into your 'numbers'). If you take into consideration the extra amount you'll spend in mortgage repayments while the property is sitting dormant, you might as well have paid someone to do the work (and possibly even a PM to co-ordinate it for you). I have paid a PM to do every single reno I've ever done - and I've always made a good profit.

There's so much to know - but I take my hat off to you for asking the 'experts' about what you need to know.

Good luck with it all!

Thanks for responding with such detailed input Jane. We actually spoke on the phone last week, I think you know who I am And thanks again for being a sounding board. I do think your services would help us in our expert team. As mentioned in a previous post, I am currently in the process of reviewing my medium-long-term financial targets to work out if this whole reno gig will realistically help me get there. Once I have completed that analysis, I can take the next step to determine exactly which renovated "product" will produce the results I need. Working backwards, I can then determine exactly what to buy with various costs etc.

I have my hands on an excellent training method right now and am working my way through it with the missus. It is exactly the deep financial planning analysis on running reno's as a business we were looking for. Already money well spent as I can see ways we can capitalise on it in our own home and one of the IP's we own. As to whether we progress to doing this as the major new strategy or not, remains to be determined (as per my previous comments). I don't make decisions like this flippantly, to say the least.

To answer your question more specifically. Yes, we have what I would call "intermediate" property investing experience. We have 4 IP's in a couple of states. A successful experience with manufacturing growth through a strata title has been the "catalyst" to get me exploring this reno gig. Seems that once you get a "taste" for it, the hunger becomes greater. Definitely seeking to repeat the success of the strata, but I know that like all great purchases, they are extremely difficult to come by.

The coach thing is of interest. We used a similar service a couple of years ago to get us started in property investing. I can say now that the $4.5k has paid for itself. I am definitely happy with the skills, support and process so far. But like all good students, I am looking to leverage the knowledge into greater gains. Worst case scenario, we don't do the reno's and we rinse/ repeat our current cashflow +ve strategy, perhaps with some slight twists to ensure we hit the timeframe goals we have set.

As always, all about risk/reward/quality of life.

 

[emptyvessel]

EV, perhaps building or borrowing a spreadsheet to work on your numbers could be helpful, plenty around. That way you will get some more targeted feedback on the numbers, important factors you can really control and that add value are you research into sale values and of course your buy price.

Great advice Andrew and exactly what I have done. I also have formal training in running the numbers on buy/hold cashflow +ve properties before buying.

Due to inexperience and impatience to begin, I ignored those numbers a little on my first purchase. Believed my Buyers Agent judgement over that of the numbers. That said, got started and then bought my second IP sight unseen in another state. Did a strata and has since been a very positive experience to give me the growth I needed to keep going. Which is where I am right now.

I might take you up on the offer to publish my numbers on a deal for scrutiny by the experts. Would be an awesome experience.

 

[travelbug]

Other people post about buying 5 IPs in 6 months... I think they are just buying houses, not good investments.

Errr, are you agreeing with me or disagreeing?

You've bought very well, especially your last... but that wasn't an "easy" reno and the gains were hard earned and not without risk.

Disagreeing with the fact that you assume that because people are buying regularly that they aren't good investments. I bought 3 last year all CF neutral to +. 1 was a quick 1 week reno (carpet, paint, lino, new vanity) CF neutral and $20K equity.
Year the other renos were hard earned but no-one is going to dump $50K into your lap. You have to earn it. Hard work never hurt anyone. Risk? Buy a house, fix it up. I don't see a high risk factor here. More risk in buying and waiting for CG while being negatively geared.

Thanks travelbug. We are working on some more medium to long-term financial analysis right now. Working backwards to determine if the time/risk of doing the reno's will actually help us reach our financial goals faster. Comparing to our current buy and hold method, that is. Not that the buy and hold isn't working, it is. I am just heavily exploring options available to bring some or all aspects of the goals forward.

We are in our 50's and don't have time to sit around hoping for CF and equity to grow itself. This is why we do the reno's. Instant equity and CF neutral at least. I'm not working until I'm 60 and I want to continue traveling. It works for us. It's not for everyone, which is why there are so many ways to make money in property. Just a matter of finding what's right for you.

 

[Truly Exotic]

Didnt want to start a new thread,

ive got a simple question,

with the for every $1, get back $3 rule for renovations, does that refer to purchase price of market price?

say if I buy a property whose market price is $200k, I buy it for $180k,

I spend $20k in renovations, and its worth $240k, yes the 1:3 ratio applies, but its only increased the real market value by $40k,

I get the feeling that, you havent increased the market value through only the renovation but through good buying? and its not worth doing the reno, you may as well, buy it for $180k, and then revalue for $200k, thus making your $20k equity gain by putting the $20k for the reno in something else??


eg buy a $500k market property for $450k, spent $20k, revalue at $510k, thats a $60k increase, 1:3 however, youve essentially spent $20k on a $500k property and only increased it by $10k!

Am I seeing things right>?

 

[Jtkumnick]

you'd have to be very good at renos to get $3 back for every 1 spent.
From what I have seen you usually get back 40c per $1.

 

[vaughan]

Didnt want to start a new thread,

ive got a simple question,

with the for every $1, get back $3 rule for renovations, does that refer to purchase price of market price?

say if I buy a property whose market price is $200k, I buy it for $180k,

I spend $20k in renovations, and its worth $240k, yes the 1:3 ratio applies, but its only increased the real market value by $40k,

I get the feeling that, you havent increased the market value through only the renovation but through good buying? and its not worth doing the reno, you may as well, buy it for $180k, and then revalue for $200k, thus making your $20k equity gain by putting the $20k for the reno in something else??


eg buy a $500k market property for $450k, spent $20k, revalue at $510k, thats a $60k increase, 1:3 however, youve essentially spent $20k on a $500k property and only increased it by $10k!

Am I seeing things right>?

I work it out like this: work out the maximum rent possible for the house. Work out the rent the house will currently get. Work out how much reno is needed to get the house getting the maximum rent. Add this reno onto the purchase price and work out the resulting yield.

Forget x-3 rules, these are all arbitrary.

For instance: a house sells for $220k, rents as-is for $270 pw. Max rent possible is $350 per week. Needs a $15k reno to get that rent. So spend $235k to get $350 per week. As-is yield was 6.4%, after reno was 8.3%. (Note that if the top rent was only $290 pw then the $15k reno wasn't worth doing, you'd have to do a cheaper reno.)

Say that exact same house was fire damaged and instead sold for $135k but needed $100k to get the $350 pw rent. The deal is still exactly the same. But if you're look for 3x value then you've missed the opportunity because you're looking at the wrong numbers.

 

[MsAli]

Disagreeing with the fact that you assume that because people are buying regularly that they aren't good investments. I bought 3 last year all CF neutral to +. 1 was a quick 1 week reno (carpet, paint, lino, new vanity) CF neutral and $20K equity.

Travelbug, when you talk of equity, do you mean what a buyer will pay you on a given day? Or what the bank will value the property post renovation?

I'm confused and hence this caused me a lot of analysis paralysis when I was researching for my IP....because I wanted to make sure that I get it so much below market value that it's ACTUAL value is higher after reno (not just a bank valuation)...May be this isn't a smart way of doing things? And may be it can be a mindset I need to shift. But definitely when you are buying a property below market value, you are actually paying the market value (in most cases) for one reason or another and most likely because it needs some sort of renovation....as someone I know said, "it's not magical" it's because there is a reason e.g. reno unless it's genuinely a fire sale.

I'd like to hear other view points as well on drawing equity versus ACTUAL market value.

 

[Truly Exotic]

I work it out like this: work out the maximum rent possible for the house. Work out the rent the house will currently get. Work out how much reno is needed to get the house getting the maximum rent. Add this reno onto the purchase price and work out the resulting yield.

Forget x-3 rules, these are all arbitrary.

For instance: a house sells for $220k, rents as-is for $270 pw. Max rent possible is $350 per week. Needs a $15k reno to get that rent. So spend $235k to get $350 per week. As-is yield was 6.4%, after reno was 8.3%. (Note that if the top rent was only $290 pw then the $15k reno wasn't worth doing, you'd have to do a cheaper reno.)

Say that exact same house was fire damaged and instead sold for $135k but needed $100k to get the $350 pw rent. The deal is still exactly the same. But if you're look for 3x value then you've missed the opportunity because you're looking at the wrong numbers.

vaughn, can you explain this a bit differently, I am muchos confused,

I get that the 1:3 rule is arbitrary by the fire damaged example,

how do you come to 8.3% after reno, 350 per week at $220k is 8.3% but thats not incorporating renovation costs

and as per your firedamaged example, sure 135k purchase 100k reno, thats $235k, but wouldnt it be better to purcahse the $220+15 one, that way you only need to put in $15k as opposed to $100k cash???