Your first IP - reno vs. newer property?

[seapiggy88]

Hi everyone,

I've finally saved up enough to buy my first IP and I'm pretty keen to get into the market ASAP! However, after browsing through numerous properties on RE.com and reading on SS, I'm interested to know the thought process and stories behind your first IP when you started out.

Would/did you start off with :
1. A cheaper, older, run down property (requiring more maintenance on an on going basis) and renovate to increase CG,

OR

2. A more expensive, newer/renovated property where all the hard work has been done (less ongoing maintenance).


I am a FHB, my strategy is buy & hold and I'm looking into regional towns around Melbourne. To qualify for the 50% stamp duty reduction, I would need to live there for 12 months before renting it out. Initially I was after a no-fuss, set and forget IP, but then I thought I could take advantage of this period to add some equity to fund my next IP. I would like to continue buying every 1.5-2 years (assuming sufficient CG/CF and my salary permits).

However, I have no experience in renovating whatsoever - this would mean pretty much using tradies for everything (except probably pulling carpets/tiles out with a hammer and painting).

I'm sure most people here would have been in a similar position at some stage - can you please advise on what you would do if you were me and why, given my situation?

Would also appreciate stories of your own experiences around renos on your first IP as a newbie and what you would have done differently in hindsight



Cheers,

Seapig

 

[EN710]

Would/did you start off with :
1. A cheaper, older, run down property (requiring more maintenance on an on going basis) and renovate to increase CG,

OR

2. A more expensive, newer/renovated property where all the hard work has been done (less ongoing maintenance).

I can only talk from my experience as a noob.
I seperate IP purchases from PPOR.
My PPOR is a new building bought off the plan when I was green and doesn't know anything. I choose it for my needs, not for IP, though it might become one down the line. Perfect location for work, 5 mins to train station, conveniently close to shopping centre that just got upgraded.

my first IP is old run down property that requires (apparently, just find out this year) a LOT of fixes. The hardest part is to find out what needs fixing when you didn't plan for them, so my tips: if you're doing this, make sure the extent of work need to be done, plus add buffer on top.
As long as you don't mind living in a messy place for a while, living in there and doing the work can be rewarding I think.

IP2 is similar, old 1960 property, but I got set budget, got the property vacant on settlement. The reno work was a lot smoother.

 

[nowork]

Hi,

I am a newbie as well and I only have the one IP so far, but I did option 1. I had no experience, and learnt a lot from family, friends and tradies. Was great fun (stressful as well) and very rewarding, my one regret is I didn't get to enjoy living in the house once I completed renovations as I had to move for work. The house rents well.

Learning experience for me, don't get emotional attached to your hard work. Tenants won't care about how long it took you to renovate it. I think you do it to enjoy it and build up that value, but just accept it probably won't get greatly looked after as it would with you living in it.

IMO I feel you need to work out how much it will affect your current lifestyle (both options) and if you are happy with that to happen.

For me, I'm looking forward to returning home to Australia and buying another one or two to buy and renovate..now that I've had IP1 value go up after renos and paying more into it.

Good luck with it.

 

[D.T.]

Is 50% SD discount really worth it?
Compare this with the 12 months rent and tax reductions you forgo.

In regards to your other question, if you're new id prefer to reno over buying new. This will give you the equity gain you need to roll into purchase #2 in the same year. The new property may have better returns but you'll be sitting on your hands waiting for next deposit to be found.

 

[onyx]

We just bought our first IP and went with option 1.
The fact we can add value ourselves with some reno work plus have the potential for CG suited us much better then option 2. However, it does depend on the property and it's condition when purchasing. So try and suss out as much as you can and have a buffer like others have mentioned.

All the best!

 

[wylie]

We bought houses that were greatly in need of work and did most of it ourselves. That is how we made our money, mostly in the form of equity.

 

[Jen_PFR]

We bought houses that were greatly in need of work and did most of it ourselves. That is how we made our money, mostly in the form of equity.

+1
(10 chars)

 

[Jaggannath]

Reno, it's more fun too.

 

[seapiggy88]

Thanks everyone for the replies so far! Sounds like reno might be the way to go even if it requires more effort.

DT good point, I'll have to crunch the numbers to see if its worthwhile for me.

 

[travelbug]

Thanks everyone for the replies so far! Sounds like reno might be the way to go even if it requires more effort.

DT good point, I'll have to crunch the numbers to see if its worthwhile for me.

Yes definitely crunch the numbers. Not sure about Melbourne but some dumps have been going for not much cheaper than already reno'd properties. People think they can make money by doing a reno but in actuality not everyone does.

You need to look at the difference in price between the price of a run down property + reno costs, then see what an already reno'd property costs. If the difference is great, go for it. As mentioned, it can be a great way to build equity fast.

 

[DaveM]

Without sounding like Rixter, whats your strategy? There is no right answer without determining this.

If you are buying a single IP for gearing and depreciation benefits and will never buy a second, then a new property with maximum depreciation and gearing losses may be best.

If you are looking to build a multi property portfolio, starting off with a regional new build with little CG prospects and negatively geared may not be the way to start, unless you are able to reguarly pay deposits for additional properties via tax paid income. Not the most effective way from a tax point of view.

 

[seapiggy88]

Hi DaveM,

This is my strategy:

I am a FHB, my strategy is buy & hold and I'm looking into regional towns around Melbourne. Initially I was after a no-fuss, set and forget IP, but then I thought I could add some equity to fund my next IP. I would like to continue buying every 1.5-2 years (assuming sufficient CG/CF and my salary permits).

Definitely looking at a multi property portfolio! I want to make the best purchase I can now to set me up for my future acquisitions.


I'm looking at houses in the lower end of range ($200-250k, depending on how much work it requires) so that I can get as close as possible to neutrally geared. A lot of these allotments are on smaller blocks (<300m2) but very close to the town center. However, I'm wondering if it would be better to buy farther out ~5km out on a bigger block with subdivision potential for greater CGs over time. Is there similar potential for CG in inner city/town vs suburbs in regional areas?

 

[Connolly]

First IP purchase is the one that will make or break depending how quickly you want to accrue portfolio.

My first IP had criteria
Sub 250k spend
Min 600sqm block
Min 6.5%yield
Had to be able to create equity fast to leap frog into next purchase
Vacancy rate sub 1.5%
Population 15,000min
Transport/ diverse industries, blah blah blah you get the jist

Anyway found a dump that had been on market for a while, required a lot of work (flooring, carpets, blinds, paint, fencing, basic bathroom freshen up, etc etc) put in low ball offer, went back and fourth until agreed on price (they had committed to another purchase sow they had to sell fast)

Put in 3months work and 20k (I did most works using books, tradies from gumtree, and youtube to learn how to do certain jobs I had no clue on)

Finished reno, revald and bought another two within 12months.

IP #3 just finished reno, revald pulled equity out and sat in offset. Looking to pick up another 2 in the next 12months.

All purchases I work back from the same criteria except spend is now sub 300k.


Lessons I have learnt and applied along the way

#1 Reno properties allow scope to leap frog very quickly if you buy right and assess the numbers
#2 You can learn everything you need on youtube and from books for basic cosmetic reno.
#3 You do not need to be a tradie (I wasn't) to get started, you just need to be willing to have a crack
#4 Do your numbers- for every dollar spent on reno aim to get back at least $2-3 in the reval. If you cannot see the backend reval stacking up on the spend do not pull the trigger
#5 If you want a solid portfolio of houses. Never ever buy OTP; will only hamper your buying power and ability to pull equity
#6 Don't chase perfection- its an IP. If the area and numbers stack up pull the trigger. Its a business and numbers dictate business.


If can help out further feel free to PM


All the best

Ben

 

[bigdealbaby]

First IP purchase is the one that will make or break depending how quickly you want to accrue portfolio.

My first IP had criteria
Sub 250k spend
Min 600sqm block
Min 6.5%yield
Had to be able to create equity fast to leap frog into next purchase
Vacancy rate sub 1.5%
Population 15,000min
Transport/ diverse industries, blah blah blah you get the jist

Anyway found a dump that had been on market for a while, required a lot of work (flooring, carpets, blinds, paint, fencing, basic bathroom freshen up, etc etc) put in low ball offer, went back and fourth until agreed on price (they had committed to another purchase sow they had to sell fast)

Put in 3months work and 20k (I did most works using books, tradies from gumtree, and youtube to learn how to do certain jobs I had no clue on)

Finished reno, revald and bought another two within 12months.

IP #3 just finished reno, revald pulled equity out and sat in offset. Looking to pick up another 2 in the next 12months.

All purchases I work back from the same criteria except spend is now sub 300k.


Lessons I have learnt and applied along the way

#1 Reno properties allow scope to leap frog very quickly if you buy right and assess the numbers
#2 You can learn everything you need on youtube and from books for basic cosmetic reno.
#3 You do not need to be a tradie (I wasn't) to get started, you just need to be willing to have a crack
#4 Do your numbers- for every dollar spent on reno aim to get back at least $2-3 in the reval. If you cannot see the backend reval stacking up on the spend do not pull the trigger
#5 If you want a solid portfolio of houses. Never ever buy OTP; will only hamper your buying power and ability to pull equity
#6 Don't chase perfection- its an IP. If the area and numbers stack up pull the trigger. Its a business and numbers dictate business.


If can help out further feel free to PM


All the best

Ben

Good post ben, very informative.

Still undecided on the strategy I want to pursue but yours is what I am leaning too now.

Still renovating my PPOR to extract equity which will one day be and IP. Plan is next property to buy a place for reno but one that doesn't require quite as much work.

 

[citystar]

+1 vote to option 1: buy the neglected IP at under market value and increase the value and rental return with a quick reno.

 

[seapiggy88]

Ben, thanks for your post - it was really helpful, especially the lessons learnt part.

I'm compiling a list of questions to PM you with soon Feel free to reply to the questions here if you feel they are relevant to this thread so others can also learn too

 

[strongy1986]

It's probably easier to make money rennovating in a regional city than a capital city. There's less buyer desperation. For example in melbourne and Sydney if a cheap dump of a house came up in a good area you could almost guarantee that whoever buys it will pay too much for it and will find it hard to make money.

In fact some wouldn't even care if they do make money. They just want a ppor in that area and would be happy to renno a place for no gain if it meant they can get into an area

 

[albanga]

I also say go option 1 but a few things to consider:
If you buy regional and do a Reno, where are you located? If your spending 6 hours a week driving to a site then your holding costs will greatly blow out (not to mention car costs).

Also you mentioned the possibility of buying a bigger block further out to subdivide but in regional towns is there a market for this? People who live in regional towns usually like the fact they get land unlike inner city living.

Another consideration is equity for your next purchase. whilst a renovation should add some (depending on how well you go) your less likely to see capital growrh in a regional property. So what happens if after paying closing costs, holding costs, Reno costs your valuation comes in break even? If you have turned the property positive then the additional Cashflow will help a little but it won't get you quickly to your next purchase. So now your holding a property not likely to see as much capital growth.

I know your budget is limited but have you considered a metro property? Maybe a 2 bedder unit. I am unsure where you live but it will likely be easier to get to maybe even allowing time after your 9-5. Given your just starting out the smaller space may be a good start for your first Reno. You could also turn it CF neutral or +. Ofcourse if you research right and find the right area your also likely to see more growth as well.

Just some thoughts, but good luck!

 

[strongy1986]

I also say go option 1 but a few things to consider:
If you buy regional and do a Reno, where are you located? If your spending 6 hours a week driving to a site then your holding costs will greatly blow out (not to mention car costs).

Also you mentioned the possibility of buying a bigger block further out to subdivide but in regional towns is there a market for this? People who live in regional towns usually like the fact they get land unlike inner city living.

Another consideration is equity for your next purchase. whilst a renovation should add some (depending on how well you go) your less likely to see capital growrh in a regional property. So what happens if after paying closing costs, holding costs, Reno costs your valuation comes in break even? If you have turned the property positive then the additional Cashflow will help a little but it won't get you quickly to your next purchase. So now your holding a property not likely to see as much capital growth.

I know your budget is limited but have you considered a metro property? Maybe a 2 bedder unit. I am unsure where you live but it will likely be easier to get to maybe even allowing time after your 9-5. Given your just starting out the smaller space may be a good start for your first Reno. You could also turn it CF neutral or +. Ofcourse if you research right and find the right area your also likely to see more growth as well.

Just some thoughts, but good luck!

Definitely a market in regionals for subdivided land

Also easier to find a good block as not every man and his dog is an 'investor'

Anything in melbourne that someone can subdivide or put units on they pay too much for (in the sub 1 mill range) - I would think that unless your a builder then you will most likely loose money trying to develop a newly purchased block in melbourne

 

[joanmc]

Most of ours have been dogs that needed renovating but they have ended up having good cashflow. We had some skills at the start but only because we had already painted and tiled our first 2 PPORs. Both of these skills are easy to learn. Jump in and have a go.
You will learn more from your mistakes