Renovation Standard & Spending Dollars

[Quick Learner]

Hey Guys,

I am constantly looking at ways of improving my renovation process.
Ive found myself wondering lately- Could I do a lower overall standard of renovation and increase my profit margin?
What things do I not do in my renovation if I did want to reduce costs?
What other ways can I reduce costs?

What I have done to date and am doing with one property- Render, Roof Restore, Full new bathroom, new front door, landscaping, letterbox, carpets, painted, down lights, exhaust fan/heat lights, new door handles, light cover plates, venetians. (may have left some things off but reasonably high standard)

With my current renovation half way through I have allowed for alot of labour. Painting is being completely done by trades and had all sh*t jobs in overall preparation done by handyman. My budget is the same as the first reno at about 26k (11% of property purchase cost) but I have not had to do a kitchen and Ive cut costs in as many areas I thought possible cos this is a lower socio economic suburb then the first. (5k total last time inc benchs, cupboard and appliances).

I hear of people doing quick rejuvenations for 10k, I know all too well 10k doesnt go far. Id like to know exactly the break up of where they spend this 10k and if they are holding these properties.

The upside of the reno is CG and increased rental and desirability. I am beginning to think that my intended purpose for the property will dictate to what overall standard I renovate too.

Id love some thoughts and breakups here and hoping all of us renovators can pool together some good discussion.

Regards
QL

 

[skater]

Hubby & I did a complete reno last year on a badly vandalised house which included a granite kitchen & large merbau deck. Total amount spent was around $17k. You can find a full description here: http://www.somersoft.com/forums/showthread.php?t=20019&highlight=latest+project

We did all the work ourselves, so that kept the cost considerably lower than if we had used tradies.

 

[Dis]

I've done a reno on my PPOR and we are thinking of doing a reno on my wife's IP. The PPOR reno was reasonably expensive - didn't have a clue back then - with tradies doing everything except the painting. We also finished to a highish standard because we intend to live here for 10ish years.

Now the IP. Hmmm. I keep crunching the numbers and and thinking that (for a IP im going to hold long term) a "full reno" doesnt pay for itself. I'm not selling or refinancing so a spike in the valuation doesnt mean much to me. If I spend 25K on a reno I need to increase rent by $1875 pa ($36/wk) just to cover the oportunity cost of leaving the $25K in my offset account. The reno will deteriorate so I really need to add another $2500 ($48/wk) to recover my capital over 10 yrs. Will the renal market support this.....?

A more modest reno - fixing what really needs it, or things that create alot of bang for $ - seem to generate better numbers for me, at least on paper. It doesnt give me the "feelgood" effect of making your IP "perfect", but the numbers stack up alot better when I consider what renal markets will support. Also things that aid rentention of a tenant but doesnt really increase value may be more worthwhile (eg roof insulation, A/C).

 

[Quick Learner]

Deprecitation, Rental Increase, Time Effort

Thanks for comments guys,
That feel good effect is the same that buyers and tenants feel, but we must keep our emotions out of it and focus on return. I like your view to calculating required rental increase to cover items. Is that considering depreciation as I imagine that will greatly impact your calc and make it a pretty complex one.

I had a rental apraisal on my first reno which was 190per/wk some 8 months ago and I have recently rented the property out for 240per/wk.

We need to also consider the amount of time and effort which is going in to get whatever return.... Hard things to quantify.

Anyone got some experience to layout.

QL

 

[simonjulie]

Hi Quick Learner
It is a dilema and I find myself on numerous occassions doing most of the work myself. I have just recently discovered that if I were to spend more time planning and organising others I would be in a much better position to find more bargains and good people to work with me. Thus giving me more time for the more important stuff in life. This is a luxury that I did not feel I could afford until now.
Good luck

From my experience

If you are planning to keep the property for a long time.
1. make sure all the basic things work and are in reasonable condition(kitchen,bathroom, hot water,drainage,roof and gutters,heating/cooling)

2. Most renters want clean and tidy and that the amenities work. Upgrade to attract market rent.(paint carpet and garden give the biggest bang for your buck with kitchen and bathroom upgrades as required).

3. The underlying fundamental for me is. "How long will it take to get my money back?" So I keep good records of my total input of funds until values rise sufficiently and I can refinance the property thus taking back my original investment so I can then go on to the next deal. The residue holding cost (if negative) from the refinance is recorded and then taken into account with future refinance deals on that property.

4. The cost of renovation should reflect the kind of market the property is in.

5. Always keep the rentals well maintained and well presented to the rental market(top 10% in it's categary) wether it be a one beddy flat or a harbourside mansion.

Hope this helps.
Simon

 

[Dis]

My budget is the same as the first reno at about 26k......

I had a rental apraisal on my first reno which was 190per/wk some 8 months ago and I have recently rented the property out for 240per/wk.

QL

So lets look at these numbers .... are they good or bad? Weekly rentals in my area are around the 190 - 240 mark and yields are about 4.5%. Your area may be a bit different but I'm going to assume this happened in my back yard.

Scenario 1 - Buy, renovate, sell
Assuming a 4.5% yield, a weekily rent increase for $50 translates to an increase in value of about $58 k. You've created $2+ for every $1 you invested. Looks like you did great !

Scenario 2 - Buy, renovate, hold and rent out.
Using the method of calculation I used in my first post, you will need to increase rent by $87.5/wk just to break even. More once you consider the dilution of income from property managment, letting fees, and vacancy rates. So, if you are holding the property long term, things dont look so good . Of course there are variables that the numbers dont account for - maybe you had to do some of this to make the property livable, maybe you have improved the quality of the tenants you attract or reduced vacancy rates. On the other hand maybe you have priced out most of the tenants in the area. Or maybe you have put in alot of unpaid time and labour, so you need to get back even more rental to justify your efforts.

That's the irony. You can do everything right and perform a fantastic value add but, for a property you are going to hold, the numbers often dont make sense. It seems to me that its often a case of less is more.

Here's a hypothetical. If I gave you a budget of $2600 (10% of your original reno) and 2 weekends to work on the house, how much do you think you could have improved the rental by? Would it be

a) $5/wk (10% of the rental increase you obtained).
b) $8.75/wk (break even costs)
c) $10+ (making a profit)


~Dis

 

[Quick Learner]

Hypothetical

Interesting Hypothetical Dis both interms of time and money input.
I guess its not only the numbers we need to consider but also how many other deals could we be doing if our attention on a particular property and our money in a property wasnt taken out as quickly as possible. Time=opportunity=money

Thanks for the posts - thought provoking stuff!

 

[Sultan of Swing]

Now the IP. Hmmm. I keep crunching the numbers and and thinking that (for a IP im going to hold long term) a "full reno" doesnt pay for itself. I'm not selling or refinancing so a spike in the valuation doesnt mean much to me. If I spend 25K on a reno I need to increase rent by $1875 pa ($36/wk) just to cover the oportunity cost of leaving the $25K in my offset account. The reno will deteriorate so I really need to add another $2500 ($48/wk) to recover my capital over 10 yrs. Will the renal market support this.....?

Another way of loking at it is this.

If you're going to do a 'cheap' reno, it's still going to cost between $10k & $15k, so what you're really doing is only spending a further $10k. Therefore, it's $10k - $15k you'd be leaving in your offset account, not $25k.

Add to this the depreciation you'd hopefully be able to claim, the extra rent you'd hopefully get, be it on $10 or $20 a week, plus you may get tenants that will stay longer giving you less vacancies between tenants. A weeks rent here and there soon adds up.

You'd also have the "feelgood" effect of making your IP "perfect" and know that your tenants are living at a good standard.

An additional benefit is, it should increase the value. Although you don't want to sell in the near future, who knows what's around the corner. You may just need a revaluation so that you can borrow more against it for further purchases. You may need an LOC against it at some point.

My way of thinking is, take a long term view and look at the bigger picture.

My 2 cents

 

[Sultan of Swing]

Will the renal market support this.....?

....but the numbers stack up alot better when I consider what renal markets will support.

BTW, are we talking about he same thing?? It sounds to me like you're dealing in kidneys, which is a market I know nothing about.

 

[Dis]

typo

 

[redwing]

I believe the Reno Kings look at a $4 return for every $1 invested and usually go for "cosmetic makeovers" and a "very" short time span to reno and get back on the market.

Reno Kings

Worth having a look at thier site, Brenda may be able to give some more tips here after thier last Bus Tour?