Is this reno viable? First time!

Discussion in 'Adding Value' started by Kirsti, 15th Jun, 2015.

  1. Kirsti

    Kirsti Member

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    Newcastle, NSW
    Hi SS team! Sorry this is a bit long. I've tried to include all the info that might be relevant. Thanks in advance for reading it!

    I have never renovated before but am very interested in learning. I'm cashed up but time poor. My brother is an electrician but he's struggling to get enough work so has a fair bit of free time. He's pretty handy so we were planning to buy a place together and do it up with me doing the research and putting in more money and him doing more of the work.
    Our grandfather was a property developer (30+ years ago) and did extremely well from it. He's still around and we're definitely planning to get his advice on almost everything we do while we still have a chance, but he's not very mobile now so wouldn't really be on site. He's also not up to date with current pricing of materials and labour so that's where somersoft comes in!


    I think I've found a place with a lot of potential and am trying to work out the viability of the project.
    Haven't gotten pre-purchase inspections yet so they might turn up some extra issues that we haven't noticed, but based on the following do you think my costings sound good? Is there anything major that I should be considering?

    The house I'm interested in is in what I suppose is almost a "city fringe" suburb. It's one of the first "family feel" suburbs you hit on your way out of the CBD. The suburb has already started to move a bit this cycle but I think there's more steam in it, and this property seems like a bargain as far as I can tell. It does back onto a train line that is used by both passenger and coal trains. It's about 1km from the nearest station so the trains are going slowly as they pass. A coal train came past while we were inspecting the house this weekend but we didn't notice until we walked outside. It was just background noise while the doors & windows were shut.

    The house is 3 bed, 1 bath, double carport and single garage on 463sqm (although the garage is just a sad looking tin shed in the backyard and probably needs to be knocked down). The house itself is is about 100sqm
    Based on recent sales I think the renovated home would be worth a bit over $500,000.
    The house next door, which is a 3/2/2 but only on 392sqm, sold for $485k about 12 months ago.
    Another house 1.5 blocks away which is 3/1/1 but on 493sqm (still backing onto the train line) sold for $520k last month.
    So I think $500k is a pretty good estimate of end value.

    The house is going to auction so the purchase price could be anywhere. The agent is suggesting bidding starts from $295k and they'd be happy to see it end around $360k-$380k.

    Things that I have noticed that need fixing:
    - Needs a new roof. There is mould on ceilings in two rooms so it definitely definitely leaks. It is also old looking tin so I think best to replace the whole thing with modern colorbond instead of trying to repair.
    - Ceiling also needs replacement. I've assumed that I would have the entire house replaced instead of just the sections that are damaged.
    - It has a working fireplace but the chimney, which is external, is cracked, leaning and currently braced up. Am assuming we would have it torn down. Not sure whether it would be worth replacing it or just keeping a non-working fireplace for decoration.
    - Floorboards in bathroom don't feel very sturdy. They're under vinyl so couldn't see them, assume they will need replacing. Boards in the rest of the house seem to be fine so hoping it's just limited to that area.

    Then there are the cosmetic things that would make it much nicer:
    - Update kitchen
    - Update bathroom
    - Paint internal and external
    - Rip up concrete in backyard and lay fresh grass
    - Remove old garage, maybe replace with garden shed (could possibly even build a granny flat, I believe the land is just big enough but with the train just behind it might not be very appealing)
    - Possibly erect a front fence

    I've tried getting some quotes/researching prices online for the various bits of work and this is what I've come up with (using the higher quotes and assuming that my brother and I wouldn't really do much of the work, to be conservative):
    - new Colorbond roof, including sarking and guttering, removal of old roof, and allowing for about 50% of the battens to need replacing - $11k
    - tear down old chimney and tidy up wall, assuming not structurally important - $3k
    - new plasterboard ceiling throughout whole house (might only need to do the damaged rooms so hopefully I'm overestimating, but thinking whole house might be needed for consistent look) $5k
    - stabilising the floorboards in bathroom/laundry (10sqm). I think I want to lay tiles in these areas so needs to be solid. Unsure of the cost of stabilising and 10sqm of tile installed. Allow $2k - $3k??
    - new carpet in bedrooms - $3k - $4k
    - new flatpack kitchen. Allow $10k
    - bathroom upgrade (shower screen, replace basin/vanity, wall tiles seem ok, maybe just spray paint them and bathtub, not sure if anything else is needed) - allow $8k
    - painting internal and external - allow $10k
    - removing backyard concrete & laying grass - allow $4k
    - miscellaneous - $10k
    - 10% contingency for overruns - $7k

    Total reno budget = $75k (which I hope is very much an overestimate)

    I'm ignoring holding costs because my brother would live in the house once the roof was done and save on rent. When complete he would keep living there for a while as his PPOR

    Therefore, if the property does go for $380k at auction, plus 5% purchase costs, plus up to $75k of reno costs, I think we could be looking at total cost of $475k, which should get us a revaluation at least $500k.

    Considering I've tried to do this as a worst case scenario, and we could cut thousands off by doing things like painting ourselves, I think it's an acceptable margin. Therefore I think I should get the pre-purchase inspections done and get ready to bid at the auction, or even try putting in an offer of $350k/$360k prior to auction to see what happens.

    We think the house is 1940's/1950's and it probably has asbestos in it somewhere. The roofer didn't seem too concerned and the agent "doesn't think" that it's an asbestos ceiling (says it's old horsehair plaster).


    My questions to the forum are:
    - does the whole strategy seem sound?
    - do the cost estimates seem reasonable?
    - if there's no asbestos in the ceiling or roof, and we're not disturbing any of the walls, do we have to worry about asbestos?
    - is there anything major I haven't considered?


    If you made it this far, thanks again!
     
  2. andrewtfarr

    andrewtfarr Member

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    From purely a numbers perspective here is how Cherie Barber does a high level overview of a project.

    - Review what reno'd properties will go for.
    - Purchase cost x1.42 needs to be either under or matching the sale price (as per above point)
    - This is taking into account a reno budget of 10% of the purchase price.

    Please note this is for a cosmetic reno so doesnt include structural costs etc. I didnt delve too deep into what needs to be done and the costs but this might give you a decent starting point.

    Good luck!
     
  3. Kirsti

    Kirsti Member

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    Newcastle, NSW
    wow, I'd read a few articles from Cherie Barber before but hadn't come across the 1.42 ratio.
    That actually comes out at a purchase price of about $355k, so it's in the ballpark.

    Thanks for the tip

    The reno budget I put together is more like 20% of purchase price to account for the structural stuff and the extra 10% comes straight out of the profit margin, but I feel that since it's my first time and a learning experience I could accept a profit lower than Cherie would.
     
  4. MIW

    MIW Member

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    Check, if you have Established Capital Benchmark, meaning there is a disparity in the price say like the one you plan to buy and if similar properties renovated sell fro $500K as you assume?
    The formula assumes you have interest holding costs and it is only a cosmetic renovation or minor wall removals so minor structural. Major structural would mean you plan to add meters to the overall property, either creating extra rooms, or bedrooms, or bathrooms, etc...
    Good luck in your endeavours!
     
  5. Tim86

    Tim86 Member

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    Main advantage here from what i see is that you will be creating work for your brother. Electricians tend to be very handy and are one of the smarter trades. So he can probably do most of the jobs. If you have $70 000 worth of work that u can put his way, then thats awesome.

    Potential problems: when the market starts to cool its the properties close to traffic and trains etc... That stop selling first.

    Also your brother might find work and then not have any time for your project.

    I looked at a similar property in brisbane, same scenario, close to train line, advertised low, selling back in 2012. It ended up going for $300000 more than what the agent told us. So dont get your hopes up too much.
     
  6. Kirsti

    Kirsti Member

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    Just wondering if anyone else had any feedback on this scenario?

    Am working on my finance pre-approval today/tomorrow.
    The agent called me on Monday and said that other buyers were considering making an offer prior to auction. I asked him to keep me in the loop if that happened and haven't heard back yet so must not have been as urgent as he was making out.
     
  7. andrewtfarr

    andrewtfarr Member

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    The formula on a structural reno is purchase price x1.9 needs to equal sales price.

    BUT - if you are adding a bedroom or bathroom at that price point it should be close to achievable...the key is really making sure you stick to your budget or find ways to come in well under budget...I know that sounds obvious but a lot of people want to go in and put in new bathtubs or a brand new $20,000 kitchen etc when in reality you can install a really good kitchen for about $5k...at the price point you are looking at you need to ensure you dont overcapitalise as buyers wont pay extra for super expensive benchtops etc when buying in the $500-600k range...well not in sydney anyway but hopefully you see what im getting at.

    Good luck!
     
  8. andrewtfarr

    andrewtfarr Member

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    It rarely is...put together your numbers and make a fair offer...if its not acceptable there will be other properties in the area you can use the same numbers etc on...if there is only 1 property in the area you feel your numbers can work on then you are in the wrong area!
     
  9. Ace in the Hole

    Ace in the Hole Don't compete, Dominate !

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    I'm wondering that if your brothers going to be doing all that work, do you really need to get building and pest inspections?
    Is he not able to sus it out himself considering if you go ahead, he'd be all over the house anyway at some stage in detail.