Full renovation analysis on high end 2 bedroom apartment with workings and costings

[DavidMc]

Yeah I've been trying to get an idea of the end value. That's my first priority now. Should have done it earlier. It's a little harder in Toorak, I'm looking at some places worth millions and rent for $1200pw... sure, they're nicer inside but they're still just a 2 bedroom apartment with parking.

I think that recent sale (March 08) in the block of $635k will hold me down. OTOH, even if I can get $1:$1.25 it still might work out as I'm living in the place as I will get to enjoy it.

 

[buzzlightyear]

Thanks for your response Buzz. It has been very helpful.

If you don't mind, what were the start/end values of your place? Where was it located? How much/how long did it take to finish? When did you start the reno?

(via PM if you prefer).

Theres a new Bunnings in Hawthorn, right next to the Army Barracks (saw an ad for it, might not be open just yet).

Pm'd you.

Yes, i forgot about the Bunnings in hawthorn. That's all a Bunnings addict needs.

 

[stumunro]

Hi David!

I don't think your budget is way off, I think your estimates seemed reasonable for what you are trying to achieve. Some points that come to mind

- Always count Body Corporate to be a pain in the ***
- Trying to add value to a unit at the wrong time might not be worth it - i spent 15 k renovating my first unit and when i revalued the guy didn't even go up and see it. Without a doubt the works were necessary, but it was lucky I wasn't trying to pull the money back out so quick and it didn't cost me any opportunity elsewhere.

I think the risks are

- overcapitalising.. I would agree that the works would be necessary in order for you to impress prospective purchasers to increase a sale price. Valuers, on the other hand, seem to find it easier to compare un-renovated to renovated rather then good renovation to really good renovation; which means the most basic of basic renovations (repainting & updating kitchen cupboards / benchtops & recarpeting) will get around the same valuation as a renovation that cost 20k more.

- the state of the market having more affect on the valuation of your unit then the unit itself

At the end of the day if the unit is original then at some stage you have to bite the bullet and update it.

I would really recommend a simple do over - keep everything really basic and be realistic about what you are going to achieve. If the numbers add up - and you have gotten a few real estate agents to vouch for them, then proceed - but lay caution


P.S One of my best mates is a valuer and works for a high end property consultancy firm full of accredited valuers. If you would like me to ask more q's about what they look for in renovated properties PM me and I will ask for you

P.P.S Have you spoken to a property manager re: what will get you your top rental amount. Id seriously recommend getting them in and going through the place. You need to really understand the market there if you are going to make expensive decisions to try and achieve it. A unit can only be as good as the block and location.

 

[mja]

Hey'ya David,

A view from the bathroom would be great if you actually used the bath.

Is there any chance that the view could get built out at all?

-- MJ.

 

[BayView]

Valuations - bad time?
Purchased April 2007 - $592,000
Revalued by bank in February 2008 - $675,000
Comparable unit in complex sold March 2008 for $635,000

Guesstimate property value in January 2009 $650,000 (have not confirmed)

Estimated yield on completion - $460pw (+$90pw, +25%).
$80 x 50 = $4,000 extra cashflow pa (not including new depreciation)

Estimate based on similar property located 11/16 MAPLE GROVE TOORAK asking $455pw.

Estimated valuation on completion - TBD, need to research more. If I spent $45k I would need it to be at least $720k.

Sorry, but none of these numbers work for me. Especially when you consider the current climate we are in/entering.

You may have very little growth in the next 12-18 months (or more - no-one knows for sure). Not even Toorak is immune to no growth periods.

So, even using the purchase price, and after a reno and raising the rent, the yield is only going to be 4%.

If you get the val you expect, the yield drops down to 3.3%.

I hope
a)you are a very high income earner,
b)the rates drop down another 2% and stay there for a very long time,
c) the LVR is less than 50%
or all of the above.

 

[DavidMc]

- Trying to add value to a unit at the wrong time might not be worth it - i spent 15 k renovating my first unit and when i revalued the guy didn't even go up and see it. Without a doubt the works were necessary, but it was lucky I wasn't trying to pull the money back out so quick and it didn't cost me any opportunity elsewhere.

I'll talk to my finance guy about valuers for my lender, wonder if they'll do the same. If so maybe I should just say I renovated it!

- overcapitalising.. I would agree that the works would be necessary in order for you to impress prospective purchasers to increase a sale price. Valuers, on the other hand, seem to find it easier to compare un-renovated to renovated rather then good renovation to really good renovation; which means the most basic of basic renovations (repainting & updating kitchen cupboards / benchtops & recarpeting) will get around the same valuation as a renovation that cost 20k more.

That's interesting. Thanks. Based on that you would want to do the Ikea kitchen, however unsure if that's shooting myself in the foot due to the area.

Some of my decisions (in particular timber boards versus vinyl boards) were also based on lower long term maintenece. Having real timber boards will cost me $2k more but not only does it look better it lasts longer (can be sanded back etc).

- the state of the market having more affect on the valuation of your unit then the unit itself

Agreed. That's whats going to make or break. Sure, I'll get the value back sometime, but when? Especially after I did so well strategically locking in that higher valuation back in Feb 08.

At the end of the day if the unit is original then at some stage you have to bite the bullet and update it.

Yeah, that's part of the drive to do this. If I'm ever going to renovate it, might as well do it early whilst I'm living in it so *I* can be that first person to spill red wine all over the carpet and enjoy it for as long as possible.

P.S One of my best mates is a valuer and works for a high end property consultancy firm full of accredited valuers. If you would like me to ask more q's about what they look for in renovated properties PM me and I will ask for you

That would be really great! I'm sure the whole forum would like that info too. This block has excellent foundations (location, floorplan, views, park, etc), so it would be great to see what (on top of those unchangeable things) can be done to increase the valuation.

P.P.S Have you spoken to a property manager re: what will get you your top rental amount. Id seriously recommend getting them in and going through the place. You need to really understand the market there if you are going to make expensive decisions to try and achieve it. A unit can only be as good as the block and location.

Haven't spoken to a property manager but have spoken with friends who have been looking for a similar rental for a few months. Unsure if I'll get a quote lie from a PM.

 

[buzzlightyear]

Haven't spoken to a property manager but have spoken with friends who have been looking for a similar rental for a few months. Unsure if I'll get a quote lie from a PM.

A good PM will also give you an insight into the types of features that are well received by renters, not only a rental price. This of course may already confirm what you already know, but sometimes that is re-assuring to know.

Their information will be slightly different when looking at re-sale, but sometimes they provide some good insight.

They also have contacts with traddies as well, so they may also come in handy.

 

[stumunro]

David, had a few beers last night with my mate and put your scenario to him and he made the following points (ill try & remember)

- If your renovating for a valuation the biggest risk you face is overcapitilising. He said valuers are very objective, and will certainly note the specification of the renovation but not to the extent as say a prospective purchaser who becomes emotional.

He said that the most fundamental fact about valuing is that they can only value a property based on recent comparable sales in the area. He said in your case this would be Very important, because unless there were units which sold with a high spec renovation - there would be NOTHING to compare it to. It doesn't matter how much you spend (25k, 50k, 100k, 200k) on it you will only get as good a valuation as something COMPARABLE!
He said valuers CAN NOT take into account that you have renovated above and beyond what the market has paid, he said only try and break the market roof if you are selling - because that's the only time you can affect the 'market value'.

I'm sorry to harp but he said make sure there is a clear understanding that, at the end of the day, you need to understand what has sold in the area and at best replicate what has been done.

He also said, that if you are aiming to maximise the potential value of the property, especially in a suburb like Toorak, the renovation should be the spec of what people buying in Toorak expect. He said if you are needing to renovate regardless, look at what properties are for sale and what is being bought. If the IKEA kitchen is common then put that in, but if people in Toorak expect more, then you need to put in something better. He said that in a buyers market - this spec might not reflect the current valuation but in the long term its important your unit is par to what is around.

He especially pointed out - that in a buyers market that you will most likely not add any real value, perhaps recover some of the building costs but the only way you could be sure is to get recent sales data which includes valuers specification of the renovation - or get lots of real estate agents that know the market and have sold similar properties to inform you.

He said that it's not a waste of money to do the renovation - but if you are looking for short term game you seriously need to consider your timing. Not to mention if you are renting out the place, the affect of tenants messing up your good work.

Sorry if this is disjointed there were many beers between paragraphs

Hope this helps.

Did I miss anything?

 

[murtagh]

One thing which might have been covered, but I missed .. is that from memory you're living in this apartment currently?

I'm wondering if that will affect the possible outcomes here - reduced depreciation allowance, or treating the work as maintenance rather than improvement?

 

[BayView]

One thing which might have been covered, but I missed .. is that from memory you're living in this apartment currently?

I'm wondering if that will affect the possible outcomes here - reduced depreciation allowance, or treating the work as maintenance rather than improvement?

Good point.

If you do the renos while living in it, you cannot claim them until you turn the property into an IP with a rental income behind it.

I don't think it's retrospective either, unless it's within a certain time-frame from completion such as the current financial year?

Of course, I'm no qualified expert - read my disclaimer at the bottom.

 

[PrimeCommercial]

Value add aims
1. Increase bank valuation for finance purposes.
2. Increase rental yield (add 'emotional' appeal through lifestyle features).
3. Great bang for buck (aiming to achieve an increase of $1.5-2.0 for each $1 spent).
4. Low maintenence, durable (property will be held long term, 20+ years)
5. Appeal to target market / finish suitable for high end area





Revalued by bank in February 2008 - $675,000
Comparable unit in complex sold March 2008 for $635,000

Guesstimate property value in January 2009 $650,000 (have not confirmed)


on reno $37,800 - Total so far (more items to be added no doubt)

Current yield potential around $370pw.

Estimated yield on completion - $460pw (+$90pw, +25%).
$80 x 50 = $4,000 extra cashflow pa (not including new depreciation)

Estimate based on similar property located 11/16 MAPLE GROVE TOORAK asking $455pw.
Negatives: more units in block, no dishwasher, no balcony.
Positives: features sep laundry, 2 bathrooms.

Estimated valuation on completion - TBD, need to research more. If I spent $45k I would need it to be at least $720k.

1) some of the things you have mentioned arent exactly low maintainance. All but the expensive floating floors are rubbish and unless you were looking to sell the place straight after I'd go for the timber vinyl as suggested.

2) Run the numbers.
Current yield potential around $370pw.
Potential rent $460
$90 pw extra x 52weeks = $4680

Cost of reno $37800 - at an IO rate of 7% = $2646
So your spending $2646pa to get $4680 a return of $1.77 for every dollar spent, Its within the range you suggested.

Questions
1. Is this a bad time to undertake a value add due to conservative valuations? Would I have to wait too long before I could get my money back?

Yes I'd say its a bad time, No I dont think you'd have to wait too long to get your money back. Up to 24 months maybe.

2. What areas are best bang for buck items for the value add?

A colour consultant

4. Would my money be better spent purchasing a new IP?

Hard one, Thats up to you to decide, but I would continue with the reno but if I was not going to sell for 20years then I'd be more concerned with doin the cheapest reno possible to get the most gain in rent. I'd be looking for $2-$3 increase in rent for every dollar spent.

5. I plan to use borrowed money to perform the value add. Is the interest on this tax deductable (I am using the money to increase the rent (i.e. income))?

Yep

7. Gut feel is spending $65k to renovate a 2 bedroom apartment is overkill. Thoughts?

Definately, IMO.

 

[see_change]

Hi David

For me the 50 K figure sounds reasonable / unit . We're about to reno the two we've bought in Mosman and it's going to come in around 100K for the two. Two new kitchens / bathrooms ( with layout changes ) strip wall paper / Paint , new power boards , Carpet , Wardrobes , plus sundry minor repairs.

If you work in a trade , and know you way around the building industry you can do it for cheaper , but in the past when we've started looking at cheaper stuff we've found the quality isn't there and we've had more maintenance issues.

We've seen some reno's done really cheaply that are going to cause all sorts of headaches in the longer term especially if you're going to keep it and not flip . In Toorak you don't want to cut corners.

I'd agree , the most important person to get is a color consultant or a good interior design consultant ( we use the later and have used the sam guy for the last 9 years ) . We picked him by going around display homes and seeing which schemes we liked the most and finding out who did it.

We had ours in last monday and he came up with a good scheme and some great ideas on rearranging layouts in a cost effective way.

Obviously increased valuation is important , but increasing servicability and getting better tenants can make it worth while.

Cliff

 

[DavidMc]

Thank you all for the advice. It's been great.

I've decided that in this climate I will not be able to get the place revalued to extract any equity gain straight after the renovation due to the follow reasons:

a) Locked in a high valuation of $675k in Feb 2008.
b) Unit sold in complex for $630k in March 2008. I'm top floor and it's ground/first, but it has a garage (vs my carport) and it has a study. It was also renovated perhaps 5-8 years ago.
c) Renovated ground floor unit has been on the market for 11 months now, and to my knowledge no offers over $610k.

I may however still proceed with the renovation because;

a) I live in the property and will enjoy the modernisation
b) I am on the verge of securing a new job
c) I will have to update the property at some stage
d) I really, really wish I had a dishwasher (every single one of my IPs has one but not my PPOR!!!)
e) I will still be adding value to the property and will be able to extract this added equity sometime in the future

 

[DavidMc]

The final timber quotes are in, might help others considering timber floors:

45m2 of flooring (a large 2 bedroom apartment, hallways, living, dining) - 'Armstrong' brand

The real deal timber 14mm ($79m2 1 strip stuff) - $4,826.
The real deal timber 14mm ($58m2 1 strip dark brown colour that's on special) - $3,923.
Vinyl 9mm - $2,187.

Includes carpet removal, quad (trimings) + stain, leveling estimate, furnature removal, delivery.

 

[DavidMc]

Note I've had quotes of $15k and $11k for this. To the best of my knowledge those above prices are the best you can get unless you do it yourself.

 

[DavidMc]

A colour consultant is a great idea. I was planning on perusing the Display Homes just to 'copy' a whole colour scheme, but having the consultant is even one step better.

Any other ideas to find one? Someone mentioned Dulux paint stores will lend you one for free (as they'll push their paint).