Watching the Block, the Renovators and Selling Houses Australia can easily give you the itch to want to renovate! It’s easy enough to paint some bedrooms, sand the floorboards and call yourself a renovator. Anyone can slap paint on a wall, but knowing exactly what you need to do to improve a space and increase a property’s overall value requires expert knowledge, which many people do not have.
How do you know if the tiler you’ve chosen has quoted the right price? Will your bathroom and kitchen really take two weeks as promised – or will it drag out for an extra two months? Should you always go with the cheapest quote?
As with all aspects of property buying and investing, renovations require careful planning and execution. Investors must bear in mind that the purpose of renovations is to maximise the property’s equity, so the profit is often in the decision-making, not necessarily in picking up the tools.
Why should I renovate?
Renovating your investment property can give you capital growth, even in a flat market. The instant profits that come from a renovation can be used to help fund any negative cash flow. At the same time, undertaking careful upgrades will prevent maintenance for years to come, giving you a hassle-free, passive investment. So far, so good! But very few property owners know how to get these results without any stress.
If the renovations are carried out correctly and with the right advice, you can make tens of thousands of dollars in equity in the first year alone. It can be as simple as new paint and new carpet, or it can be as complex as a complete gut and refurbishment.
How much should I spend?
There’s no hard and fast rule on this but it’s always a good idea to engage an independent and impartial property valuer before commencing your renovation. You can easily become emotional when buying and renovating a property, but when you become too emotionally involved, it usually leads you to overcapitalise because you get carried away and believe that the more you spend on the project, the higher its final value. On the other hand, if you undercapitalise, potential tenants or prospective buyers are likely to obtain a discount on the property as it hasn’t been renovated to its true potential.
Many amateurs make renovation plans, believing that a $30,000 kitchen renovation will add $50,000 to the property’s value. A good valuer will know that homes in the street won’t sell above a certain value – even with a new kitchen – and the renovator would be lucky to add $30,000 value.
In this scenario, a valuer may suggest spending just $10,000 on simple improvements such as new cupboard doors, benchtops and flooring, which could add $20,000 to $30,000 to the equity, which is double or triple the investment.
Property valuers are best found through recommendations, internet searches or asking their industry body (The Australian Valuers Institute). I recommend you find a local valuer as they’ll know the prices in your area well, along with the type of demographics that would appeal to your particular property.
What can I do myself to keep costs down?
On much larger jobs you could pull in a quantity surveyor who can provide you with a list of what labour and materials cost on certain jobs. This will ensure you’re not overcharged. The quantity surveyor can also provide a depreciation report on the additions you have made to highlight all the deductions you can claim on your tax return.
You should also always go to tender and get a number of quotes, using the first quote to ensure that everyone is quoting “like for like” on a line-by-line basis. This is where many people get caught out.
Let’s say you’ve asked for three quotes to paint the front mailbox of your duplex. One quote includes priming, painting and weatherproofing. The next quote includes painting the letterbox and repair of the broken latch. The third quote includes painting and weatherproofing, with free paint touch ups to any scratches over the next 12 months.
Can you see how difficult it is to compare these three quotes, when they each outline different work? You need to compare apples with apples, so make sure you detail the specifics of the job, and ask each supplier to supply (in writing) the guarantees they offer, such as a fixed price, penalties should the job go overtime, warranties on workmanship and so on.
Another approach is to look at a “fixed fee” versus “cost plus”. A fixed fee will cap what you pay, but may include a fat contingency for the builder for unforeseen problems. “Cost plus” can work out cheaper if all goes to plan. If you do lots of jobs or you are completing a big project, you could always see if a builder will do a joint venture instead and work for a percentage of a profit after sale or revaluation.
Where do I start?
Start by choosing the right property, making sure it is an unemotional investment, as opposed to an emotional home purchase.
Are you looking to buy, renovate and sell, or buy, renovate and hold? If you’re selling it’s imperative that there is an immediate and almost guaranteed profit in the deal. If you’re looking to hold, you need to buy the right property that will continue to grow strongly forever. The renovation profit in a hold strategy is more about icing on the cake, maximising your rental return and ensuring you have minimal maintenance to do in the future.
Next, work out a rough time and cost budget. If you want to renovate for profit, every extra dollar you spend has to give you at least one to two dollars in added value. Be mindful of how long your renovation will take as every day costs you another 24 hours’ worth of repayment on the mortgage, with no rent coming in.
Consider adding a 20% to 25% contingency for unforeseen expenses that always seem to crop up once you strip off the tiles or wallpaper. It’s all about being prepared for the worst, so check your finances to see what funds you have available, if the renovation takes a turn for the worse.