The myth of making $zillions by reno

[evand]

Its a simple debate: If a reno increases a houses value by say $100k from $400k to $500k. Then all ongoing capital growth will be on the higher renoed figure. Say 7% growth compounding on $500k ongoing or 7% growth compounding on $400k ongoing.

This is the way i look at renos re rent and i think its the correct way. Here's an eg:

Say it costs $50k to do a reno on a $500k house. Using a LOC at lets say 6% IO, that's about $57/week interest for the $50k.

If that reno increases the rent by say $75 per week its a success.

You can do the same thing for the capital increase due to a reno.

 

[wylie]

In the scenario of a house updated 20 years ago compared to a similar property never touched, quite often a buyer will jump at the untouched one because they believe they are paying a premium for a renovation which they want to update again anyway.

Not disagreeing with what you saying, but in our area (Coorparoo and older inner areas) an untouched house will often get a higher price than one that was updated. People LOVE an untouched old house and I have been amazed at the prices these gems fetch.

Let's face it, a 10 year old kitchen may be too "good" to ditch but not good enough to want to keep.

 

[crc_error]

I'm sorry i don't agree with you.

Lets put it this way. Suppose there are 2 identical houses sitting side by side. You own one and i own the other (hi neighbour).


OK - let's jump ahead 20 years. So our houses are now both 50 years old. I haven't touched mine for 20 years, and you still refuse to update yours. So now the kitchen in yours is 50 years old, and your carpet is ratty and the bathroom would be rather old and uncomfortable and the tiling would have growths in the grouting. At least mine would be newer and possibly more presentable to a certain degree.

Who'se house would be worth more then?


g

Lets look at it this way. We have two houses side by side. 50 years later you have done 5 different renovations spending $20k each time. ie new kitchens, bathrooms, painting etc.

However when selling 50 years later, I do a reno just before I sell.

My house will be worth the SAME as your house, except I would have had ONE renovation spending $20k. YOU have spent $100k on 5 renos to get the same result as I did when selling with 1 reno.

All you got was $30 a week extra which I doubt would have covered the cost of all your renos.

Renos should be kept to the bare minimum to make the property habitable. anything beyond that is a waste of money and better spent elsewhere. Your better having cheaper rent, so your property is more affordable.

 

[crc_error]

In the scenario of a house updated 20 years ago compared to a similar property never touched, quite often a buyer will jump at the untouched one because they believe they are paying a premium for a renovation which they want to update again anyway..

exactly, these 'renovation delights' seem to fetch MORE than their renovated counterparts. as people see them as been able to taylor the property to THEIR liking.. and most people these days know the simple tricks like paint jobs and polishing boards bring up a place, with little effort.

 

[evand]

I'd say you should put a 'sometimes' in there somewhere.

Most people just want to buy and move into a house and not worry about 'updating' it.

In my experience it depends on the area the property is in (as Wylie says, inner city areas it tends to happen, but not always) and also the stage of the market.

exactly, these 'renovation delights' seem to fetch MORE than their renovated counterparts. .

 

[13910]

so you spend $20,000 in renovations, and get $70 a week more. It will take you 6 years to get your money back. by then you will need to do it all again.

Do you update your home every six years?

Sure, things go out of style - just another variable to consider when designing the renovation - but they don't go out of style that quick...if your smart. Of course, some people renovate in a way that's never been, nor ever will be, in style but that's another matter entirely.

Cheers
Greg

 

[gg1965]

But in my scenario above, i only renovated once. I'm not the fool in doing a renovation every 10 years....

Going back to the above scenario. I buy and then reno as i described above. You buy and not reno. In the short term my house will have a higher value then what yours would and i could justifiably call for a higher rent. Remember, some families, especially those with younger children, would prefer to rent a house with a newer kitchen and a newer bathroom and they would pay to do so. While not guaranteed but most likely, I would also increase the value of my house in the short term too. This gives me more equity in the house itself - by doing such simple renos (which has happened in the real world to me many times).

While i agree that some people will opt to buy an un-renoed place, i do think that others too will only go for houses that have been renovated. They may not have the time, the patience, the money, the knowledge, desire or even the lifestyle to be able to do a reno themselves.

I don't know what the ratio is between people who would buy a reno place compared to an unrenoed place, but i think it may be evenly split.


Thanks


g

 

[RumpledElf]

Most people just want to buy and move into a house and not worry about 'updating' it.

That's what it is like here - renovator's delights are cheap but they just Do Not Sell, and when they eventually do they sell for a lot under the asking price. Nice houses you can move right into, even if they are 'nice' by 1980s standards (or even just a neat, clean, 1960s decor special), get snapped up very fast.

 

[crc_error]

gg1965, by doing a reno, your simply catering for a certain client. In this case a family with kids. There would be just as many people out there wanting something cheap and wont pay the extra for a renoed place. Either way your in the same position, should you reno, you have spent money which will take years to get back with your extra $30 a week rent, or you loose $30 a week rent by renting out a older property.

And if you think your house will remain modern with its 10 year old reno, then your mistaken. Look back at todays 10 year old renos, they look nothing like the new homes and styles used today. So why should your 10 year old reno demand a extra $30 per week in 10 years time? It wont, the new homes/renos will take that spot.

and as for getting a short term gain, your not gaining anything other than a paper value. The growth of the property will remain exactly the same regardless if the IP is renoed or not. Infact as I pointed out before, the renoed IP will go up slower due to the deprication taking place on your reno.

As for getting extra equity? how much extra equity will you get? You spend $20k on reno, increase house by $40k, then you can get 80% of the $40k which is $32k. So your reno only gained $12k real redrawable equity. Less the cost of interest over the period the reno takes, and I recon you will only break even and get your orginal $20k out. Sure your house is 'worth' a extra $40k, but who cares as your not selling...

 

[crc_error]

That's what it is like here - renovator's delights are cheap but they just Do Not Sell, and when they eventually do they sell for a lot under the asking price. Nice houses you can move right into, even if they are 'nice' by 1980s standards (or even just a neat, clean, 1960s decor special), get snapped up very fast.

depends on what condition the house is in.. if its a 'demolition delight' then yes.. but if its just a 'polish floorboards and paint and slap in bunnings kitchen' then I doubt that..

More often than not, the properties which remain on the market, need far to much work done to them to bring them up to standard.

 

[eggnog]

loan of $20k @ 5.11% = $19.65pw IO.
Rent increase of $70pw from reno. minus PM fees @ 13% and loan interest = $40.25 pw extra ahead cashflow wise from doing the reno as well as CG/equity gain.


BUT, what is the opportunity cost of the original $20k? would it have been better spent elsewhere.

 

[crc_error]

BUT, what is the opportunity cost of the original $20k? would it have been better spent elsewhere.

you could buy another IP, or buy shares.

 

[gg1965]

I think we need to agree to disagree. You have your strategy and I have mine. For me, it works and i think there are others here that do the same.

We all look at investing in real estate with different eyes and different talents - and in different markets. It just happens, the markets i look at have some older styled homes in key areas that do benefit from a makeover and i enjoy doing it and i profit from it. That is my strategy. So be it.


Thanks


g

 

[crc_error]

gg1965 - so thats why there is discussion here! Everyone can learn from everyone. There is no 'right' stratergy.

My first house I bought I did a make over, and yes I made money, but I think I would have done better had I done the reno just before I sold it 5 years later. I had to repaint again, to make the house 'new' again, so essentially 'wasted' the orginal paint job.. plus I could have got a more modern kitchen 5 years later..

But then again, my mistake was selling, but thats another story

 

[BayView]

loan of $20k @ 5.11% = $19.65pw IO.
Rent increase of $70pw from reno. minus PM fees @ 13% and loan interest = $40.25 pw extra ahead cashflow wise from doing the reno as well as CG/equity gain.


BUT, what is the opportunity cost of the original $20k? would it have been better spent elsewhere.

Opportunity cost is a hindsight thing. You can't jump forward, then look back and make a comparison before you invest so opportunity cost is useless for mere mortals.

You can only maximise your investing returns using the knowledge you already have.

 

[Perp]

Opportunity cost is a hindsight thing. You can't jump forward, then look back and make a comparison before you invest so opportunity cost is useless for mere mortals.

You can only maximise your investing returns using the knowledge you already have.

But you can use your existing knowledge to get an idea what the opportunity cost is, Marc.

Opportunity cost is not only useful, but I would argue essential for successful investing.

Would you invest in residential property if you could earn more on your equity by putting it in a cash deposit account? Of course you wouldn't. This is the same as saying that the opportunity cost of missing out on the cash deposit interest is a worthwhile cost for the opportunity of investing in property. It doesn't need to be explicit, or even quantified, but you've still done an opportunity cost analysis.

I think you're focusing on the fact that opportunity cost can't be forecast accurately, and that's true. But knowing that option A is likely to return 20-80% whereas option would return 2-10% still makes those incredibly broad estimates useful in guiding decision-making.

 

[Dazz]

There is no 'right' strategy.

I never agree with general motherhood statements like that. It's too vague and wafty to have any punch.

If you have 10 or 12 legitimate investment strategies, and over time....say 10 or 15 years, 2 or 3 of those strategies consistently outperform the others both in capital growth and cashflow, then IMO it is fair to say those strategies are superior and therefore "right" in comparison to the others.

This cop-out when pursuing the other strategies, achieving either a mediocre or downright poor result and saying you are "happy" with the result is a nonsense.

How can one be happy coming 11th out of 12.



Back on topic.....our personal experience with renovations have been disasterous. Lots of money, lots of time, lots of stress and frustration for absolutely zero increase in cashflow and nil extra growth. Having the Tenants completely trash the place after the reno undid alot of the effort.

We learnt pretty quickly, and haven't performed a reno on any property in over 10 years. The result of that decision speaks for itself. There are plenty of real estate activities that one can do that add massively to your wealth and cashflow. Doing renos ain't one of them IMO.

 

[willair]

BUT, what is the opportunity cost of the original $20k? would it have been better spent elsewhere.

20K does not go far these days,with all the spruikers-get rich-quick artists that all line up to help you spend your money,if i had a spare 20k this morning i know full well how that money would be working for me on the ASX,the part i like about investing is how you spread your money in several different area,s,property is only one tool in the box..willair..

 

[crc_error]

TPFKAD, I would agree with you. exactly what I'm trying to say..

As far as been 'right' or wrong. I guess time will tell on who is 'right' or 'wrong'.

And I would tend to say from personal experiance the renovation path is 'wrong' in my opinion and experiance..

Its a bit like finding fools gold.. you think you have made money, but really you havent.

 

[evand]

Its like most things. Its not what it is that matters, its how its done. Most people don't make money doing renos (or little) because they do it wrong. Wrong time of the market, wrong area, wrong renovation, overcap, etc.

It can be very profitable if done correctly.