The myth of making $zillions by reno

[Piston Broke]

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.

I sure agree.
When the market is booming, there is no need to do anything.
All values go up regardless. Unless your in the building trade, it's a waste of time and money that should be spent searching for other opportunities good buys.
The only time I think reno should be considered is when there is no growth and many a forced to sell or being repoed.
But these days everyone is a rennovator, so the prices are built in, and if they aint, there's plenty reno kings & queens out there freshly out of seminars willing to pay too much and generally don't place much value on their time.
As for buying renoed, rarely would I as most are done dodgy imo.

 

[Ms Jade]

There is a dearth of actual examples in this thread, either positive or negative. Which may make it hard for newbies to know WHAT to believe.
If you buy a house at a very low price because it's ugly you're already ahead of the game. It may also be unattractive to investors because of low yield - i.e. It's ugly to renters as well as home buyers. Quelle surprise! Here are a couple of examples that we have done:
House 1
Buy price: $340k
Reno: $32k (10 wks)
Bank val: $460k
Rent appraisal pre-reno: $220-230wk
Rent received post-reno: $360 wk

House 2
Buy price: $530k
Reno: $60k (12 wks)
Bank Val: $700k
Rent appraisal pre-reno: $280? Can't remember exactly but it was woeful due to condition of property
Rent received post reno: $475 (crap yield suburb but high growth)
3 years later rent is $100 more but still crap yield.
I think that Evan's point is sound, though. This house has shown over 10% growth p.a. on the 700k, not on the lower figure had we not done the reno.
Obviously both of these were done pre-2008 and a rising market is your friend with these endeavours. However, there is no way that either of these properties would have been worth that much 10-12 weeks after buying them had we done nothing.

 

[Dazz]

There is a dearth of actual examples in this thread, either positive or negative. Which may make it hard for newbies to know WHAT to believe.

True enough Jade.....but then giving details on this forum just gets you in hot water. Most of the experienced posters know this. Having said that....bugger it, here is one of ours ;

Rusty Shed 1 ;

Bought for 780K 4 years ago
Dregs in there were paying a rent of $ 500 p.w. plus a carton of beer. They also offered as part of the bargain to throw in a lamb on the spit every Friday arvo as part payment of rent. We politely declined.

Our reno consisted of simply kicking the dregs out. Cost 4K for a bobcat and truck and legal fees and marine grade chain and locks. Couple of death and bomb threats received along the way....but nothing out of the ordinary.

4 years later the place is still a rusty old shed....but 4 years older.

Current rent is $ 4,200 p.w. and the Bank just valued it at 4.2M. Good yield suburb but obviously crap growth. Impossible to get both apparently.

there is no way that either of these properties would have been worth that much 10-12 weeks after buying them had we done nothing.

Based on the above example, we very much like doing nothing.

 

[Piston Broke]

However, there is no way that either of these properties would have been worth that much 10-12 weeks after buying them had we done nothing.

If your a >avg or high earner, you could earn enough deposit for another IP.

 

[lizzie]

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.

i'll agree with gg1965 ... i only reno before selling and try not to tenant them in between (except that damn rebuild elephant property!!). all my current ip's are maintained, but not improved, waiting for something "better" to happen to them.

over the years i've made good money out of reno-ing. best was a reno and subdivide in one where i made $250k spread over 2 years. most reno's i make around $80-100k, after expenses and before tax. it comes down to picking the right house in the right area and doing the right reno.

beats going "out" to work and really i should do more of them, but getting to lazy ... now, technically i should be outside painting so had better go.

 

[lizzie]

Based on the above example, we very much like doing nothing.

ah - but dazz - from memory the clearing out of the uncountable tonnes of "stuff" was not nothing ....

but yes - fantastic example of what one can do when seeing past the piles of rusty garbage.

 

[wylie]

I think it all comes down to the fine line between "maintaining" and "improving".

We have happily improved our IPs between tenants by a quick repaint. I do the painting and am not working, so my time is not being taken from anything else. I would not want to pay a painter to freshen up a house, just for a tenant to subject it to normal wear and tear.

If a house has been let for several years to one tenant or several, it will probably look less "sparkling" as when they went in, so a quick, cheap whip through with a roller will mean the rent stays high. It costs almost nothing to do and means the rent stays higher than if it was not done.

We have also installed dishwashers and air-con slowly as tenants move on. Generally the higher rent means these are paid for within two years, so we find it a cheap way of getting a bigger pool of possible renters. Most people want dishwashers and air-con in the price range we are renting at.

Where I would not do work is in anything major, that will have to be redone prior to a sale. We have done a lot of bathrooms over the years because the existing ones were shocking and renting the house without doing the bathroom would severely restrict the pool of potential tenants. However, we do not go overboard and keep them simple so they don't date.

I believe that if a house isn't freshened up with paint when needed, the pool of renters diminishes, especially in our area where we have an old queenslander, but for the same rent money, a tenant could get a new build with more facilities.

We try to make sure that anything we spend is not wasted on simply making it pretty for no ongoing weekly rental gain.

 

[travelbug]

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.

I think you are clutching at straws. No-one in their right mind would do that.

Doing a small reno is not going to set you up for life. It increases rent and makes the property more attractive to purchasers.

When you buy an unrenovated property you get it much cheaper than the cost of a renovated property minus the reno (otherwise you're wasting your time).

There ARE people doing this for a living. I know a few people who buy houses, renovate and sell. They make a VERY comfortable living.

Not all strategies are for everyone. Because you don't "Get it" doesn't mean it doesn't work.

 

[BayView]

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.

I agree with everything you say here, Trace.

But you are forgetting that you are thinking about this with a very extensive knowledge base. You have the knowledge to make an educated forecast and factor in an opportunity cost based on your knowledge and experience.

You have the ability to guestimate better than most, but even then; it's only a guestimate. You may still get it wrong, and many people with far less expertise than you look at the opportunity cost aspect of a scenario, wonder if they could do better elsewhere and then do nothing out of fear of "failure".

Rather than this, I'd suggest the average punter concentrate on what they know, and make the best decision based on that, without worrying about the opportunity cost of their actions.

In my case, I know only property. Could I have made more money in shares? Maybe, but my knowledge of them is so poor, I suspect I would have put my family out on the street.

 

[Perp]

I'd suggest the average punter concentrate on what they know, and make the best decision based on that, without worrying about the opportunity cost of their actions.

In my case, I know only property. Could I have made more money in shares? Maybe, but my knowledge of them is so poor, I suspect I would have put my family out on the street.

Tomatoes, tomatoes... hmmm, that saying doesn't work so well in text.

I'm sure we agree on the principles of decision-making; we simply have a different understanding of "opportunity cost" - and I think my understanding is right

I would argue that in your latter statement you have done an opportunity cost analysis. "I suspect I would have put my family out on the street." Therefore you've forecast that you would make more money out of property than shares.

The opportunity cost can - and does - vary between individuals; it's not simply the potential yield that anybody might make. Since you don't think you could make any money out of shares, then the opportunity cost to you of not investing in shares is zero.

 

[lizzie]

Rather than this, I'd suggest the average punter concentrate on what they know, and make the best decision based on that, without worrying about the opportunity cost of their actions.

i'd then suggest that someone interested in this path start small ... buy a house to live in and reno it to get a feel of costs and ability. the advantage is that any capital gain is tax free and one has to live somewhere so holding costs are minimised.

as with anything new - start in chewable chunks as the learning process is quite stressful and then, when comfortable at that level, move on to something more challenging.

part of the problem is that people see these reno shows where they make over a house and garden in 3 days and think it's easy. or they want to make money instantly without effort - but to make money from reno's means hard work and effort in short bursts. still beats going out to a 9-5 job.

 

[Piston Broke]

part of the problem is that people see these reno shows where they make over a house and garden in 3 days and think it's easy. or they want to make money instantly without effort - but to make money from reno's means hard work and effort in short bursts. still beats going out to a 9-5 job.

Thanks Lizzie, that's exactly what many of us are saying.
Yep, beats 9-5, but when your running your own biz doing something you like, does'nt make much sense to quit.

 

[quoll]

In my experience, late December and January are the peak letting times for my properties. Lots of competition for the available stock.

I've got property in outer suburbs by the beach, December is terrible no one rents, November early is OK but late no action, suburbs everyone is getting ready for Xmas. January is fantastic.

I've found June/July/August to be quite ordinary. A few lookers, but they don't exactly beat the door down.

Mid year for our target area is fine, not as good as January but you will get a tenant within 2 weeks easy.

You can look at a Capital city as a whole and get one picture, you can look at the EAST / WEST / SOUTH or NORTH as a group and get another picture, you can examine each suburb and get yet another picture or even dive down into a street or groups of streets to find yet another picture.

The unit market is different to the house market, and you have differences between cheap and expensive houses. I find that is why if you target an area and become an expert on your area you are better off. Find what works for you.

Cheers
Graeme

 

[quoll]

Often you hear people(gurus) say they make huge money ($100K, $200K) by renovating, eg. buy $250K, sell $400K after reno. For those actually doing it I think how the money is made is to buy way below the median price for the area. So the trick is to buy at $250K in an area where the median price is $400K, may be spend $50K on reno, and then sell the property at the normal sell price. So how money is made is not because of some awesome renovation skills, but buy low and sell at the normal price. No bank will value a property for $400K in an area where other properties are only worth $250K.

Renovating from my point of view also includes, creative methods. If you purchase a corner block, reno the house and subdivide the backyard off. Then you can make some good cash. The numbers would look like purchase $280k, sell $420k in 6 months.

Or purchase a block of 3 units, community title them, give them a paint and tidy up, add a carport, sell each separately.

Or buy a townhouse, get early access, paint and tidy then onsell before settlement and transfer sale into your purchasers name to reduce fees and charges.

Lots of ways of doing things.

Cheers
Graeme

 

[eggnog]

I agree with everything you say here, Trace.

But you are forgetting that you are thinking about this with a very extensive knowledge base. You have the knowledge to make an educated forecast and factor in an opportunity cost based on your knowledge and experience.

You have the ability to guestimate better than most, but even then; it's only a guestimate. You may still get it wrong, and many people with far less expertise than you look at the opportunity cost aspect of a scenario, wonder if they could do better elsewhere and then do nothing out of fear of "failure".

Rather than this, I'd suggest the average punter concentrate on what they know, and make the best decision based on that, without worrying about the opportunity cost of their actions.

In my case, I know only property. Could I have made more money in shares? Maybe, but my knowledge of them is so poor, I suspect I would have put my family out on the street.

 

[BayView]

If I was given $100k to do whatever I liked with (for investing) over 10 years, there are a number of options.

Each one has an opportunity cost due to what I could or could not achieve if I'd invested it elsewhere.

It's not until I get to the end of the given investment period that I can measure what that cost is, and it's like going out shopping after you've bought something and hoping you don't see it cheaper elsewhere.

It's all too late, so why bother seeking what the answer is?

I can't measure it before the investment is made.

I can predict, but that's all.

 

[blaster]

I spotted two rippers on the w/e. Vic . One of the problems in being a small fish - you can only buy and do so much.
Personally I've always liked the house that no one wants because of some stupid thing that ruins its appeal . Have bought and done two of those and doubled comfortably on each spending very little.
I think the high spending or expensive heavy duty reno work becomes much dicier and you need to know your stuff.
It's amazing whats around though.


Cheers

 

[blaster]

Renovating from my point of view also includes, creative methods. If you purchase a corner block, reno the house and subdivide the backyard off. Then you can make some good cash. The numbers would look like purchase $280k, sell $420k in 6 months.

Or purchase a block of 3 units, community title them, give them a paint and tidy up, add a carport, sell each separately.

Or buy a townhouse, get early access, paint and tidy then onsell before settlement and transfer sale into your purchasers name to reduce fees and charges.

Lots of ways of doing things.

Cheers
Graeme

G'day Graeme.

I've never understood the on sell before settle stuff . I mean what do you tell the solicitor in the meantime - hold of on the typing up until the last minute or what ?
And then too doesn't the seller get a bit suss on the changing of names at the last minute ?
I know it's all doable I've just never gotten the finer points.

Cheers

 

[Perp]

it's like going out shopping after you've bought something and hoping you don't see it cheaper elsewhere.

OK, I'm in the mood for flogging that almost-dead horse...

Using the shopping analogy, it's more like knowing that your standard weekly grocery shop has always been an average $20 cheaper at store X than store Y in the past, based on numerous times shopping at each store. So even though you don't go and check what their prices are today for every item that you plan to purchase, you can be fairly confident before you go in that you're again saving $20 this week by shopping at store X.

It doesn't matter if you only save $18, or if you do well and save $25. The alternative to making some forecast of the price differential between the two stores is to toss a coin, which would, over the long run, mean you're paying more.

Yes, it is only a prediction. Predictions are useful.

 

[Aaron Sice]

we were looking in craigie and beldon WA for a while.

before we bought what we bought, we were SERIOUSLY looking at a VERY run down, vandalised 4x1 DB&T on 690sqm in craigie for $165k.

over the road had a very similar home, sloping the opoosite way, for $265k.

now, if you'd have had the time, this house had good bones and would have cost about $50k in an IKEA kitchen, flloor coverings, window treatments, paint, tiles and some roll out turf in the yard with some swap-meet plants.

$50k for reno = $100k increase in value = $50k profit for a solid 3 months work.

not a bad return in anyone's language - no doubt you could have wiggled them down to make the $165k asking price include stamps - just to round things off.

anyway, the house got snapped up. i'm sure someone made a killing out of it, but there was no "doubling of price" or "massive rental returns" - just some profit or equity to be had by buying a bad house in a good street, lower in price than comparitive homes in the area.