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 Kitchen and bathroom are all original - functioning well but outdated.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?
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?