Is renovation still a viable option?

[Sailesh Channan]

I am interested in finding out if anyone is making any money from renovating in the current market.

From where I stand I find it difficult to see how anyone can create substantial equity from such an activity. The reason behind this statement is that the cost of renovations has gone up significantly and finding suitable trades people or builders is still difficult.

For those that are adventerous and decide to tackle the renovation themselves, needless to say you will save a lot of money in labour cost. But is all the pain worth the trouble because, the next step is getting a valuer over to value your pride and joy. In todays depressed market you will find valuers are undervaluing properties quite significantly....especially for refinance purposes. As an example I recently developed a set of duplexes and decided to revalue the properties inorder to tap into the equity, despite having sold around 6 identical pairs of duplexes in the same location they valued my property $50 000 below the contract price of the sold properties. This was the best we could manage from two seperate valuers. Needless to say I was not impressed.

So, where does this leave the renovators. I believe renovation is still a good way for most investors to get into the property market as it allows you to get in at an affordable level and add value. In todays market you cannot expect massive equity gains. However, the biggest benefit will be seen in the increased rental returns and modest tax benefits.

 

[dags]

have you tried alternative lenders such as

www.investorsdirect.com.auor
www.investorfinance.com.au

 

[lizzie]

basically it gets down to knowing your market.

look at the area you want to buy in. how much are renovated houses going for? what sort of renovation are you looking at and how much would it cost being conservative on the high side? (then add 5-10% buffer as costs always blow out). so if you then deduct the costs of the reno, and selling costs, from the sale cost of a renovated joint, deduct a profit margin you would be happy with and you end up with a purchase price of a property requiring reno ... you cannot pay any more than this price.

ie,

similar reno'd places selling for $400k
estimatedcost of reno (plus buffer) 40k
selling cost 12k
holding cost while reno'ing 8k
profit margin 40k

purchase price should be no more than $300k

if you are paying any more than this final figure, you are paying to much

 

[robo]

Don't forget purchase costs, stamp duty and solicitor. Could you buy a property for less than 300k and sell for 400k?
Robo

 

[Jacque]

Tough in this market of stagnant prices, with more stabilisation predicted across most cities (Perth excepted), however never say never. As Lizzie has already mentioned, look at renovated properties and work backwards from there. Remember that the profit is in the buying in this type of market, and so if you get to know your micro market really well, you may be able to snag a bargain at a true under market value price. Not impossible, but requires research, time and dedication to hassling agents on a regular basis!

With all cost factored in, even keeping and selling for a year afterwards (to reduce cap gains by 50%) the holding costs, purchase and selling costs and land tax can really eat into your bottom line. This month's API mag has a perfect example by Sam Vannuniti (long time renovator) where he makes a $37K profit. Though he admits to project managing the large proportion of it, he doesn't factor in the costs of his own time and also has family helping out with some of the jobs, no doubt for a reduced cost or possibly nix

In a rising market, it's seen as all too easy to make a quick profit on a reno. After all, most of the profit would have been ascertainable regardless of the improvements. However, there's the added benefit of being able to draw down on the increased equity in preparation for the next project. Even if you fail in your attempt to onsell for a tidy profit, there's always the option of holding and waiting until the market picks up again (as long as you can afford the ongoing holding costs).

Look for an area that has a large supply of similar properties so your bargaining power is better. Search for properties that you can add value to by way of using available space to add other bedrooms or bathrooms (a la Reno Kings style) without resorting to the expense of structural changes (though knocking down internal walls doesn't count), be aware of other benefits that the property offers (zoning allows for future dvpt, appeal of a particular type/style of housing etc) and plan a thorough budget, allowing for 10-20% for contingencies.

Above all, enjoy the process and aim to learn from your mistakes. A well executed renovation should be self satisfying as well!

 

[Sailesh Channan]

Good points raised here.


I believe Jacque is right in pointing out the need to know your market as the profit is made during the purchase phase. Most investors unfortunately do not have the time or focus to stay on the path and keep looking for the right property as it is easy to purchase a property without due diligence.

In a slow market there a lot of properties on the market therefore if you plan on selling at the end of the renovation process you need to have a conservative outlook on resale estimates.