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

[DavidMc]

I'm doing a cost/benefit analysis on my first large scale value add.

Property description
Large 1950's 2 bedroom apartment in a block of 7, located in Toorak, Victoria. Kitchen and bathroom are all original - functioning well but outdated. Carpet throughout and is in poor condition. Top floor, perfect aspect, views, carport, located at end of quiet court walking distance to trains, trams and shops. Ducted heating, useable balcony, 2 x split system cooling. Current yield potential around $370pw.

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

Resources available to me
1. Somersoft
2. Renovation books / articles / websites
3. Great people and communication skills
4. Access to discount applicances
5. My own experience in property
6. Small number of tradesperson contacts
7. Not working at the moment, can supervise job/assist

Resources lacking
1. Renovation experience
2. Wide variety of tradesperson contacts

Target market
- High end renters
- Elderly couples / singles downsizing but wish to stay in area
- Elderly widows
- Separated
- Professional couples / singles
- Not families

Target market implications
- Neutral colours to appeal to wide range of tenants
- Moderate finishes and features (not cheap, but not over the top OO stuff)
- Capital and yield can be improved by adding 'emotional' lifestyle features

Lifestyle features under consideration
- Gas fireplace / Decorative fireplace
- Views (in particular create city view in bathroom)
- Breakfast bar in kitchen (enjoy city views whilst eating breaky)
- Hidden laundry in kitchen (create more space in bathroom)
- Fold away ironing board in kitchen
- Add dishwasher in kitchen
- Stainless steel applicances
- Stone benchtops
- Diming downlights in lounge

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)

Property renovations guide suggest that the best value for money renovations involve spending around 7-10% of value of the property.

Renovation maximum according to theory - $45,500 to $65,000
Would like to spend - $45,500 (7%)

Planning on
- Timber floor coverings
- New carpet to bedrooms
- New paint kitchen, bathroom, toilet (bedrooms and living paint only 2 years old)
- New bathroom / toilet
- New view created in bathroom
- New kitchen / breakfast bar
- Leaving bedrooms as is
- Leaving window coverings as is (newish Roman blinds)

Quotes to date
$07,000 - New floorboards / carpet
$15,000 - New bathroom / toilet (early guesstimate)
$03,000 - Removal of wall to create city view in bathroom
$10,000 - New kitchen / breakfast bar (early guesstimate)
$02,800 - New Whirlpool stainless cooktop, canopy rangehood, oven and dishwasher - 2 year warranty
$03,000 - New paint to bathroom, toilet, kitchen.

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

Fully functioning gas fireplace was too expensive, around $5-7k. Need to investigate non-functioning decorative fireplace.

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.


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?

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

3. Do valuers have a simple checklist (i.e. 'new kitchen - check!' or do they actually inspect and can accurately distinguish between a high end finish and a cheap job). Given this isn't for resale all I'm really doing is looking to impress a valuer, not a potential purchaser.
3a. If valuers do have a 'checklist', what are these items I can add cost effectively?

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

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))?

6. Should I get a pre-reno valuation? (a starting figure?). Note: these are free for me under loan product.

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

 

[DavidMc]

Hmmm... I just realised if the final valuation is $720k then that's only $45k up on previous valuation, which is only dollar for dollar - not a good return (although I'll still get to enjoy the property as I live in it and I'll get the increase yield).

I guess it would have to be at least $745k+. Based on a sale 10 months ago in the block of $635k this might be hard to get, even with all the renos (note that recent sale did have an updated kitchen and bathroom). Time to search around recent sales...

 

[Glenn]

Hi David,

My responses are below.

Personally mate, can you work harder than a $650k property??? What I mean is that over a 30 year period that property will probably see 8-10% capital appreciation...can you save $52,000 - $65,000 in cash each year from your current job? If not...leave it alone.

Glenn

Target market
- High end renters - become fussy, complaing renters
- Elderly couples / singles downsizing but wish to stay in area - have too much time on their hands in an expensive rental property...they will cause you problems
- Elderly widows - see above
- Separated - don't care, as long as they are working
- Professional couples / singles - good, they will be working heaps and eating out all the time
- Not families - won't live in a 2 bed apartment

 

[DavidMc]

There is no doubt I could just leave it alone and it'll do fine.

I remember last boom for some crazy reason some unrenovated places sold for just the same as reno'd ones. I guess with all those property shows people really wanted to find that 'diamond in the rough' and do it up to their liking, even at the cost of one already done up.

Personally I'd really like a dishwasher. That's what started this whole exercise! Can just stick one in without it looking silly cause the benchtops weren't as deep back in the 50's. I have checked out those Thor benchtop washers, maybe that's an option.

 

[Propertunity]

$07,000 - New floorboards / carpet

Try for 1/2 that.

$15,000 - New bathroom / toilet (early guesstimate)

Should really be 1/2 that - ie 7-8K max if you arrange trades yourself

$03,000 - Removal of wall to create city view in bathroom

A lot of $'s for demolishing a wall

$10,000 - New kitchen / breakfast bar (early guesstimate)

Top end - try for $6-7K

$02,800 - New Whirlpool stainless cooktop, canopy rangehood, oven and dishwasher - 2 year warranty

About right!

$03,000 - New paint to bathroom, toilet, kitchen.

Too much - splash your own paint around (while you're supervising the bathroom reno ) for $1K max

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

Woah there

1. Is this a bad time to undertake a value add due to conservative valuations?

Probably - especially since you are seemingly buying the reno at full tilt

Would I have to wait too long before I could get my money back?

Yes

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

Kitchens, appliances, bathrooms, floor coverings, paint, views.

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

You need to trim, trim, trim the fat out of that reno or yes buy another IP

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))?

Yes, it is tax deductible

6. Should I get a pre-reno valuation? (a starting figure?). Note: these are free for me under loan product.

Probably and while he's there get a post-reno guess valuation out of him....but you'll have to have pictures of what you're going to do to get him to be accurate otherwise its not fair on him.

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

Yes an overkill in the present market. My guesstimate would be $21-22K max.

 

[DavidMc]

$07,000 - New floorboards / carpet

Try for 1/2 that.

Wow, really?

It's real timber veneer / engineered boards 14mm 25y warranty 1 strip from www.fowles.com.au (who supply builders) around $58-79m2 supply and $25-35m2 to lay. Laminate is only 19m2 supply but I feel it's just too plasticy and cheap for such a large area especially in an expensive suburb.

Total area for floorboards is 45m2 and I was quoted $5700. This includes:
- Boards (based on allowance of $79m2 but I might go these ones on special for $58m2, bringing it down to $4755)
- Quad (+ staining)
- All site prep (furniture removal/replacement, carpet removal/disposal)
- Underlay
- Floor leveling allowance of $240 (4 bags of that floor leveling gunk)
- 5% extra boards to allow for imperfections

I came to $7,000 cause I just added $1,300 for carpet to the bedrooms. This might be too much. Bed 1 = 22.9m2, Bed 2 = 12.9m2, Total carpet = 35.8m2. Will be getting quotes on this soon.

If I go $19m2 laminate (9mm) the quote drops right down to around $3,000. That is around half, maybe that's what you were thinking? Didn't help when I didn't mention the size either...

Yes an overkill in the present market. My guesstimate would be $21-22K max.

Far out. Makes my first quote of $35k just for the bathroom seem like a joke! (mind you I thought it was and promptly put that into the round filing cabinet).

 

[Chatto]

Agree that you have definately got to get more quotes! Some of those prices are outrageous.
How emotionally attached are you getting to this place? Will you live in it eventually? Otherwise do what needs to be done and "if it ain't broke, dont fix it"
Personally, bathrooms and kitchens are what I like to look good in a unit to attract tenants.
Do you need body corporate approval for that view you want?

Chatts.

 

[Propertunity]

If I go $19m2 laminate (9mm) the quote drops right down to around $3,000. That is around half, maybe that's what you were thinking?

Yes, that or some good quality timber-look vinyl. Every REA & valuer I've had post reno always says "how nice the floating timber floor looks" but I (probably stupidly) fess up to it being vinyl.
In any event - you are after the 'look' or wow factor - not the "timber veneer / engineered boards 14mm 25y warranty " stuff you pay thru the nose for. Lets face it - will floating timber floors still be trendy reno material in even 10 years? My suspicions are probably not - and the kitchen / bathroom will need another tart up to be whatever is modern in 10 years time anyway.

 

[DavidMc]

What brand vinyl do you use? I've only seen the Armstrong stuff. I should check out more, my flooring guy reckons to go for vinyl too. I just thought it looked poor, but that was a side by side comparison with the real deal.

Another thing I'm considering is polished concrete. Need to investigate that, surely it's got to be cheaper and even harder wearing.

 

[DavidMc]

Agree that you have definately got to get more quotes! Some of those prices are outrageous.

Which in particular? Note the bathroom and kitchen quotes are just figures I plucked out of the air. I've been formally quoted $35k for the bathroom and $30k for the kitchen by three mobs... it's can be hard to get a good value quote given the property location and back then I was clueless about prices.

How emotionally attached are you getting to this place? Will you live in it eventually? Otherwise do what needs to be done and "if it ain't broke, dont fix it"

I've been living in the property for 1.5 years. I'm happy with it how it is, although I would like a dishwasher. If I ever do reno it I might as well do it early so I get to enjoy it. I don't plan on living it in past say another 2 years.

Totally agree with if it aint broke, don't fix it - however, I also like the sound of spend $40k to make $80k + another $80 per week.

Do you need body corporate approval for that view you want?

Yes I will. That will be a pain in the neck probably.

 

[boomtown]

That sounds like an awful lot of money to spend on a reno of an apartment. $15k on the bathroom sounds insane.

And seriously - view from the bathroom? Dont bother. This isnt a OO.

 

[craigb]

dumping $$ in a high end property in my opinion is not worth the paper its written on {ok then plastic}
if your going to spent $50 bloody k on anything it would be a loan of $500k asa deposit on two more run of the mill 2 bedroom units, and $200 on a coat of paint and some sugar soap, ??? sorry but sayings about fools and money, no offence please!

 

[DavidMc]

That sounds like an awful lot of money to spend on a reno of an apartment. $15k on the bathroom sounds insane.

As I said before I've got a quote for $35k alone and $10k for the toilet. That's insane. Based on that I didn't think $15k for both sounds insane, but what do I know? I'm new to this. Will be interesting to see the new quote for the bathroom from this new guy I have who isn't ripping me off.

And seriously - view from the bathroom? Dont bother. This isnt a OO.

I don't get it. I can create city views from the bathroom. You really don't think this would add any value? I think it would. How much I don't know. Being able to sit in the bath and watch the city skyline at night has big wow factor to me, question is how much will it cost to get (and body corp).

In Sydney the difference between an apartment with harbour views and one without can be millions.

(BTW it is OO too, but mainly investment).

 

[DavidMc]

dumping $$ in a high end property in my opinion is not worth the paper its written on {ok then plastic}

Can you explain why?

sorry but sayings about fools and money, no offence please!

None taken.

 

[craigb]

sorry david look at it this way, you have ip #1 value at 650k you spent 50k and the new value is say 740k and may bee you get the better rent, or not, OR you keep ip #1 at 650k value and borrow another 450k using your 50k you were using for ip,1 and purchase ip#2 & ip #3 which have a value of 650k +250k +250k =1.15 million @ say {easy numbers 10% a year your gains are $110k and you have 3 incomes not just one ,

 

[DavidMc]

Agree, or, I could spend $45k on this IP, increase it's value by $100k (potentially - and it's yield), then borrow 95% of that increase to make $95k available funds. This could buy 3x of those $250k IPs, then do value adds on those, make them close to CF+, extract equity, repeat.

One of the potential problems (and one of my questions) is how quickly can I do this in todays market with tighter credit and lower vals. I might just be better off buying new purchases and not doing any renos.

I also don't want to plan on getting 10% a year for a while. Maybe 5% a year for the next 5 years. That's why I'm investigating creating growth through value add rather than buy and hold.

 

[craigb]

sorry david look at it this way, you have ip #1 value at 650k you spent 50k and the new value is say 740k and may bee you get the better rent, or not, OR you keep ip #1 at 650k value and borrow another 450k using your 50k you were using for ip,1 and purchase ip#2 & ip #3 which have a value of 650k +250k +250k =1.15 million @ say {easy numbers 10% a year your gains are $110k and you have 3 incomes not just one ,

in my experience the best house in the suburb/ unit in a complex is usually pulled down in price due to the others that surround it, and rearly held up on a pedistool, do your own numbers, and ask why some of the units have sold more or less than others??? no one gets to see inside them all to compare?

 

[craigb]

Agree, or, I could spend $45k on this IP, increase it's value by $100k (potentially - and it's yield), then borrow 95% of that increase to make $95k available funds. This could buy 3x of those $250k IPs, then do value adds on those, make them close to CF+, extract equity, repeat.

One of the potential problems (and one of my questions) is how quickly can I do this in todays market with tighter credit and lower vals. I might just be better off buying new purchases and not doing any renos.

I also don't want to plan on getting 10% a year for a while. Maybe 5% a year for the next 5 years. That's why I'm investigating creating growth through value add rather than buy and hold.

david the finance is backed by the rents you will get and that income stream plus the deposit or equity from your first IP, wait and see what other say about this. good luck with it any way, and BTW their is no one bigger on value adding than me realy.

 

[buzzlightyear]

Couple of initial thoughts & observations....

You alluded to do more reserach on estimated end valuation. Personally, this is where the project starts & ends. If you are unable to get comparables for the price you want, there is no justification at least in the short term to proceed. The same would apply with rental information.

From my recent experience (November 08), yes valuers are being conservative and probably understandably so. With a range of properties presented to them in my report, some that were comparables & explained why other sales weren't comparables, they gravitated to the lowest valuation presented. The issue at the moment as well, is that even with an outlier (low sale price), which may be more prevalent today, this will affect your potential valuation, instead of taking an average or a mid-point, in a more bullish market.

My valuer was there for 5 minutes (max), checked his list, he did notice the finishes, but only after I was giving him some background to my reno's and my prepared report. He even missed (until I pointed out to him), the attic ladder & roof storage in one of he bedrooms. He had said he saw the property prior to it going for auction (before the reno's) in late 2007.

I would argue that your value-add project may be better suited to a more bullish time in property. Not where values are under pressure, especially if you are borrowing the money to renovate. Of course the end values & rental will confirm that.

Some comments about the costs & updates you mentioned.

What are you doing in the bathroom? Is this gutting what you have and starting new? What sort of finishes are you thinking of?

If the wall to be taken down is not a supporting wall, then you could do that yourself. I took out a couple of walls, which were actually supporting walls, but a builder put in a supporting beam. Its good fun too Even if you get someone else to do it, depending on the size of the wall, it would take a day maybe for 2 people and then the cost of removal. $3k seems pricey.

Regarding kitchen are you putting in stone benchtop? What finish on the cabinetry? I would keep the finish lower end and put in higher end brands for the cooktop, rangehood etc....Of course, that would probably add additional cost

The painting cost seems high, but then again, not sure how big the area is, or fiddly. Is it plasterboard? I decided to paint my kitchen, meals and small bathroom, along with the high ceilings. This was my first attempt at serious painting. It was a pretty good finish actually, well that is the response I got from renters, the valuer and sales agents that I got in to get their idea about value. Might be an option and could save you a $2k. You just need the time and a Bunnings nearby. There is one at Port Melbourne, which isn't too far away.

You didn't mention anything about electrical or plumbing cost?

As for the $65k spend and is it overkill. It will really depend on what end valuation you are likely to receive.

 

[DavidMc]

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).