Is a renovation profitable?

[deansr33]

Hey guys! I’m new to this forum so I’m sorry if I’m asking silly questions.


I’m a qualified carpenter and the age of 22 I’m saving for my first home and to get into developing..
I’ve been doing a lot of research about developing preparing myself for the first step.
The only thing that concerns me is that I sore a house in Doveton which is in Melbourne and last year it sold for 260,000 and was very run down I sore it a week ago for 290,000 and they has done a beautiful renovation on this house but would of cost at least 30,000 on materials.

My question is are there ways to make profit doing this?

I’m keen to do all the work myself i have been lucky to have been shown many other trade skills so hopefully it will help.

I have heard of people doing this for a living and that’s what I’m hoping to do in the future.
Just the numbers don’t seem to add up should i be looking at doing this in more expensive areas where should I start?

Thanks for your time guys Dean

 

[BMan]

if you include buying and selling costs i doubt they would of made any money

 

[deansr33]

ok thanks for your help mate. but not just in this case in others is it a profitable buisness to get into ?

 

[Angel]

Hi Dean, welcome.

I don't know where Doveton is, but at under $300K, it would be in low socio-economic suburb. The target market there can only afford to pay a certain amount for a property, this is where the numbers have to stack up.

Was the house you refer to sold for $260K or advertised at that price? If the buyer got it for significantly less, than he/she can make money. Perhaps they are a FHB and didn't have to pay stamp duty or pay lower SD? There are ways to save on purchase price in those regards.

In the more upmarket suburbs, you will have higher purchase prices and thus holding costs (Interest on your loan) but you will also have purchasers who can pay premium prices for nicer homes.

In these two scenarios, you would target the reno to your market - something very basic in a lower socio-economic suburb and something more adventurous in a higher SE suburb. In both cases you will be looking to get a run-down house that has been on the market a long time and get the vendor to accept a low offer.

Best wishes.

 

[Truly Exotic]

there are a few realistic scenarios that could be possible

1. Relationship breakdown, they renovated with the intentions of living there and all went sour, so they have to sell no matter what

2. Owner is a builder/handyman/renovator so all labour is free, just materials and time, so made an acceptable profit

3. you'd be surprised what some people are happy with in profit, Know of a property that was bought for about $150k, and sold for $190k 3 months later after extensive reno, owner said that he made $5k and he was happy with it

4. they've been watching too much "the block" and assumed Reno=Massive profits

 

[ChrisA1]

I understand for buy reno sells, there is a formula that some people use where the sale price must be at least 135% of the purchase price??

I suppose if you look at every deal through this formula and determine your costs and purchase price, then the renos become profitable.

Not sure what the formula would be for buy reno rent but obviously the increase in rent would have to be sufficient to warrant the cost of the reno.

 

[deansr33]

Thanks for all your help guys this will really help me.

Cheers

 

[Peter 14.7]

You should note that buying and selling real estate within 12 months can be treated as a business, which can mean 10% GST applies.

From your description of skills by far the best thing you can do is buy a PPOR, (personal place of residence that is your own home), work hard adding value with labor intensive items such as polish and existing timber floor, paint and patch walls, then sell as personal place so no Capital Gains tax if over 12 months.

Even if say you buy for $300k clear* add labour of $50k then sell for $350k clear * after stamp duty etc. then you are making $50k of income free of tax saying at least $13k.

Clear exclusive of costs like below.

Note: on buying allow stamp duty 10%, loan fees, legal charges and real estate agent fee say 5% etc will need to be considered. You can assume roughly buying on costs of 15% and 7% on selling. So you have to gain at least 20% before anything. Note these are very general estimations.


You will need to buy in areas where cashed up, time poor young professional buyers are looking like Footscray etc. Don't consider low income areas as it is will not work unless it is totally trashed.

Resist any radical colours and talk to REA as to what adds REAL value int he area you are. I.e. Converting a roof space into a study adds value. A new kitchen does not as it requires the new owner to like the new kitchen.

Consider leaving some easy to upgrade items like the kitchen in place so the new owner can put their touch.

Overall this can work but requires skill and commitment and income to survive the holding period. Only worth it on big stuff and day goodbye to weekends.

Dont for get any major changes may need planning building approval, try to avoid them.

Lastly, if the market drops, you may only break even which after costs is a loss. Many GURUS who brag about this system forgot to mention they market rose 20% anyhow so they only made really 10%. Not the 30% in sixmonths they claim in books, seminars, etc..

FYI and good luck Peter 14.7

 

[RPI]

Renos used to be great money makers before the reno shows on TV and bunnings cam along. Now they still can be, but it is harder to buy well.

 

[goonandtell]

renovating for profit and renovating for personal living is very different.

I got caught with a place i owned with an ex we had spent small fortune on with premium fittings and finishes and had to sell. I made a very small profit before considering labour spent. Where as the renovations we do for our rentals are much more simple but the suit the area.

Your biggest asset is your trade and potential network, one of the bigger issues i have is getting reliable trades people you will no doubt see good and bad work, make sure you grab a few mobile numbers.

As for doveton i investigated the area about 2-3 years and couldn't get my business cases up off the ground. I was looking for purchase, retain + reno existing, build on rear. The 'ceiling' potential sell price was just too low versus what i was selling as initial prices.

 

[ChrisA1]

Renos used to be great money makers before the reno shows on TV and bunnings cam along. Now they still can be, but it is harder to buy well.

Certainly agree here! And with this is that properties at the cheaper end of the spectrum are being bought up very quickly as 'reno' projects but are often bought at prices that don't make them profitable (and therefore pushing up the price of everything in the area)....

 

[Tim86]

Renovating a run down place is profitable if you've paid the price you should pay for a run down place.

Problem is people have no idea about what's actually involved in renovating a property. They watch the block and think that renovating involves hitting in one nail and then going for coffee, playing some games, and then choosing some nice new furniture, and then at the end of the day the room is completely done except the last bit of one moulding which needs 5 mins of painting...

So these people with NO idea pay way more than they should for a property because they have NO idea what the hell renovating really costs and how much work it really is.

Realestate agents spin it so a place you should knock down is actually a "Blank Canvas".

If you are lucky, you will find a run down place that looks bad enough (i.e. structural problems) so that the majority of people think it's too hard and pass on it. That way you can pay what it's worth and actually make some money on it.

But any old house that needs renovating won't do. It's still got to obey all the other rules of realestate as well. You can't buy a run down house in a run down area and expect to make lots of money. You can't over pay for a run down house and do it up and expect to make lots of money. You can't limit your options and be forced to sell after doing it up and expect to make lots of money. Etc...

 

[travelbug]

I agree with the above posters.

Lots of people think they are renovators. I've seen a fe properties of late that have been bought to reno and sell and there has been little or no profit.

As long as you are realistic in your costings (and get them right) there is money to be made. But it is harder to get that bargain.