The "don't"s of wealth creation

[skater]

Moved in to my own apartment 6 months ago (that I'd been renting out as an IP for the last 15 years) and spent $50,000 doing it up for myself to live in only to find that it has only increased in value by the amount I'd spent on it. Great lifestyle decision but poor investment/value adding move.

That is a lot of money.

We rebuilt a whole house (Nathan style) including re-sheeting the walls, new kitchen with granite bench tops, paint, floorboards, large deck and french windows for around $17k. Admittedly it was around 5-6 years ago now and we did the work ourselves. My mind boggles at what you could possibly do to an apartment that would cost $50k.

 

[ozharp]

50k for an apartment, you got taken sorry, most of the value adds are done by the owners and i would think that most some here have done appartment makeovers for about, 14k tops,

I organized most of this myself and was able to get work done far cheaper than what had been quoted to me by various companies I had received quotes from by using independent tradesmen, so it looks like I took myself for a ride. A real estate agent who looked at my apartment both before and after renovations said it looked like I must have spent around $50k on the place. This includes new windows in all rooms, gutted and rebuilt kitchen and bathroom, soundproofing of windows, furnishings, plumbing, significant electrical work, re-tileing the bathroom, dishwasher, split-system air conditioning, etc., etc. I did many things myself. Apologies for getting quality work done by qualified tradesmen to get the place in Yarralumla, one of Canberra's premier suburbs, looking on a par with a brand new apartment.

The point I was attempting to make and hopefully some of the more astute readers may have picked up on is that an expensive remodelling isn't necessarily going to be reflected in the value of said property after the work has been done. Steve McKnight pointed out in one of his books that the cost of improvements made to his family home wasn't reflected in the post-improvement value but it was no problem since the improvements were made for lifestyle choices rather than profit.

 

[Monopoly]

Don't over-capitalize

I organized most of this myself and was able to get work done far cheaper than what had been quoted to me by various companies I had received quotes from by using independent tradesmen, so it looks like I took myself for a ride. A real estate agent who looked at my apartment both before and after renovations said it looked like I must have spent around $50k on the place. This includes new windows in all rooms, gutted and rebuilt kitchen and bathroom, soundproofing of windows, furnishings, plumbing, significant electrical work, re-tileing the bathroom, dishwasher, split-system air conditioning, etc., etc. I did many things myself. Apologies for getting quality work done by qualified tradesmen to get the place in Yarralumla, one of Canberra's premier suburbs, looking on a par with a brand new apartment.

The point I was attempting to make and hopefully some of the more astute readers may have picked up on is that an expensive remodelling isn't necessarily going to be reflected in the value of said property after the work has been done. Steve McKnight pointed out in one of his books that the cost of improvements made to his family home wasn't reflected in the post-improvement value but it was no problem since the improvements were made for lifestyle choices rather than profit.

Firstly ozharp, let me just say no-one (including me) is ridiculing you for the exemplary work you've done; it was more out of concern in how much you paid, that people expressed their questions; it most definitely not was to criticise you or your efforts.

As I said, it was obviously money "well spent" because it was for YOU to live in, and at the end of the day that's all that really matters. However, if you did it in the name of PROFIT (re-sale/re-valuation) you may have spent (some, not necessarily all) the money on things that aren't clearly visible at first glance ie. soundproofing of windows, plumbing, significant electrical work. All of these things make the place better (huge tick) but unfortunately these things don't generate the jaw-dropping "WOW" from someone itching to buy the property, and/or indeed gives little justification for anyone valuing the property higher or beyond what was actually spent!! It makes sense to spend money on such things however it will not always get your money back for doing so. And yes, expensive remodelling otherwise referred to as over-capitalizing is the mortal enemy of all astute investors.

 

[MichaelW]

But it would have gone up by this amount without doing the reno anyway, that's the point, the market in this sort of suburb moved by 30-40% in this particular time frame (from Dec '08), whether you value added or not.

I know, maybe I needed to use more winks and big smilies in my post...

But don't underestimate how much a good clean up and a lick of paint can add. Costs hardly anything but can make a world of difference in appeal.

Cheers,
Michael

 

[ozharp]

Firstly ozharp, let me just say no-one (including me) is ridiculing you for the exemplary work you've done; it was more out of concern in how much you paid, that people expressed their questions; it most definitely not was to criticise you or your efforts.

As I said, it was obviously money "well spent" because it was for YOU to live in, and at the end of the day that's all that really matters. However, if you did it in the name of PROFIT (re-sale/re-valuation) you may have spent (some, not necessarily all) the money on things that aren't clearly visible at first glance ie. soundproofing of windows, plumbing, significant electrical work. All of these things make the place better (huge tick) but unfortunately these things don't generate the jaw-dropping "WOW" from someone itching to buy the property, and/or indeed gives little justification for anyone valuing the property higher or beyond what was actually spent!! It makes sense to spend money on such things however it will not always get your money back for doing so. And yes, expensive remodelling otherwise referred to as over-capitalizing is the mortal enemy of all astute investors.

Fair call. I appreciate what you are saying and wouldn't have done anywhere near as much if I had been intending to sell in the very near future. It is indeed frustrating to know how much I have spent on improving the livability of the place while also being aware that a potential buyer would be completely oblivious to much of it. A quick paint job, new carpets, replacing the doors of the original 1964 kitchen, and resealing the original windows so you couldn't feel the wind blowing in around the frames would have been about as far as I would have gone.

 

[JIT]

I know, maybe I needed to use more winks and big smilies in my post...

But don't underestimate how much a good clean up and a lick of paint can add. Costs hardly anything but can make a world of difference in appeal.

Cheers,
Michael

It just begs the question, why bother reno'ing/developing if you can make that kind of money doing nothing (apart from impecabble timing - but, IMO, not really that hard too)...

 

[Monopoly]

Fair call. I appreciate what you are saying and wouldn't have done anywhere near as much if I had been intending to sell in the very near future. It is indeed frustrating to know how much I have spent on improving the livability of the place while also being aware that a potential buyer would be completely oblivious to much of it. A quick paint job, new carpets, replacing the doors of the original 1964 kitchen, and resealing the original windows so you couldn't feel the wind blowing in around the frames would have been about as far as I would have gone.

Don't beat yourself up about it ozharp, you did it for your own comfort and safety, and that in itself is priceless!!

 

[craigb]

oz harp, i have a freind that did simmiliar, replaced all the windows, new LATEST bathroom accs, the best kitchen,with glass splash backs, new fasia and gutter, opened up some walls, etc etc, its his home and i wish him well , the purchase price was $330 at the time it was and still is a bit of a rough area, but he has spent over 50k the home accross the street same same, less the flashy stuff, just solf for $410k, his value was "you guessed it!" $410k,
the values are somtimes based on whats souring your place, unless every one does the same it shifts only a little ,
EG, when it comes to selling he will get more money than the one over the road, 'IF" potential clients see them both at the same time, how much more ?? who knows , not your place but in this instance, you cand make a silk purse out of a pigs ear, he dosen't listen to any one , so i let him go!
then we did one , over the other end of town , spent 6k and increased it beetween $75k < $100k but we will see, its going on the market now!

 

[ozharp]

oz harp, i have a freind that did simmiliar, replaced all the windows, new LATEST bathroom accs, the best kitchen,with glass splash backs, new fasia and gutter, opened up some walls, etc etc, its his home and i wish him well , the purchase price was $330 at the time it was and still is a bit of a rough area, but he has spent over 50k the home accross the street same same, less the flashy stuff, just solf for $410k, his value was "you guessed it!" $410k,
the values are somtimes based on whats souring your place, unless every one does the same it shifts only a little ,
EG, when it comes to selling he will get more money than the one over the road, 'IF" potential clients see them both at the same time, how much more ?? who knows , not your place but in this instance, you cand make a silk purse out of a pigs ear, he dosen't listen to any one , so i let him go!
then we did one , over the other end of town , spent 6k and increased it beetween $75k < $100k but we will see, its going on the market now!

In my case because my apartment is going to be my ppor for a number of years I wanted to make it a place that I was happy to come home to and a place I needn't be embarrassed to live in, hence the effort I went to. Even so it was interesting to learn that expenditure isn't necessarily reflected in an equivalent or greater increase in value. Fortunately for me the expenditure has been worth it for 'lifestyle choice', and wasn't done for immediate capital gain. Still, if/when I choose to sell any of my investment properties I'll know to keep a very tight reign on any cosmetic improvements made to try and increase value and the likelihood of a sale.

 

[wobbycarly]

Well done, ozharp.

Personal view is that I'd like to get back at least the value of any improvements I make for lifestyle choices. Anything on top is a bonus.

 

[ozharp]

Well done, ozharp.

Personal view is that I'd like to get back at least the value of any improvements I make for lifestyle choices. Anything on top is a bonus.

Fortunately, according to the real estate agent I spoke to, that does indeed appear to be the case in this instance.

 

[Aaron Sice]

some beauties i've learned to help with the process - you'd be surprised where you can apply these.

1) DON'T raise your voice. if you have to, you've already lost the argument.
2) DON'T volunteer information. silence is a negotiator's greatest weapon.
3) DON'T make stuff up. if you don't know the process/answer, say so.

 

[investor2009]

Here's my list in a nutshell without the jam in the middle

Do's: Buy some property, preferrably as much as you can comfortably afford.
Wait for equity and rental returns, monitor your portfolio in the meantime to make sure you aren't missing anything, then decide how you want to retire.

Don'ts: Dont sell any until they have done their job, if you ever do sell any..

The wait is the hardest thing for me. And I hate when we have no growth for a long time, that ***** me but I just remember that in 5-10 years we'll be laughing. And hopefully financially free ( *hopefully* based on a CG strategy)

 

[RedCat]

I have a terrible overcapitalization story which is unfortunately my own. Was living in a 3BR apt in Fitzroy. Met my future husband and decided it was too small. Sold for $415K and moved to nowhere (Bon Beach, next to Chelsea) into a 2 story 6BR place we paid $400K for. We didn't renovate, oh nooooooo.

We completely rebuilt the inside. New floor joists, relocating bathrooms, $50K high spec kitchen. Everything you would expect to find in Aaron C's $2M Richmond townhouses. Spent $200K all up and lived without floors in winter for 4 months. The house was amazing, it really was. We LOVED it. The spec suited an inner city house but we were living in Bon Beach in a typical suburban street where every other kitchen had laminate bench tops.

Six months after the reno we figured it out. When we were inside we felt gold, but as soon as we walked down the street we remembered where we lived and that we just didn't belong in the suburbs. The lifestyle just didn't suit us. So we sold up four years after the initial purchase.... For $550K.

You do the maths! We probably would have sold for $500K without spending a penny. It was our PPOR and we honestly did think we were going to live there a long time but boy what a tough lesson to learn.

 

[Intrinsic_Value]

Don'ts: Dont sell any until they have done their job, if you ever do sell any..

i cant emphasise strongly enough the extent to which I disagree strongly enough with this statement.
There is a price for everything, both on the buy and sell side. The greatest inhibitor to long term wealth creation is the statement: never sell regardless of the circumstances.

 

[buster]

Why would you keep anything unless it eas doing the "job" ?

 

[investor2009]

I think you may be taking what I said a little too seriously, which I've found is not uncommon amongst SS'ers..
You don't sell a good asset you bought just 14 months ago when it's only moved up 7%.. Or else you will lose all your profit and to enter the market again will COST you money. If I bought a unit in (insert suburb here) 10 years ago and it had done nothing I'd be pretty pissed and instead of selling it would probably light fire to it. A little clearer now?

i cant emphasise strongly enough the extent to which I disagree strongly enough with this statement.
There is a price for everything, both on the buy and sell side. The greatest inhibitor to long term wealth creation is the statement: never sell regardless of the circumstances.

 

[investor2009]

Great observation there, really..

Why would you keep anything unless it eas doing the "job" ?

 

[Sunfish]

Don't believe everything you are told.

 

[wobbycarly]

Don't believe everything you are told.

I don't believe this one.