Renovation property investment – Some Insider tips

Urban Decay

July 17, 2021

Property renovation and investing both require ample research to execute successfully.

And when you do both together you are working with assumptions, known factors and of course, unknown factors. What we are talking about here is not flipping (i.e. where buyers purchase a property, renovate and then sell on in a relatively quick time frame), but purchasing to renovate either immediately or at some stage in the future with the intention of buying and holding for the long term.

Often a property is purchased for its potential which the owners will plan to do either by way of bringing in a contractor or do it themselves and coordinate trades.

The first step in any purchase is now what you are wanting from a property. What’s your end-game?

Is it capital growth? Is it cashflow? Or a combination? What are the comparable properties in the area? Are you purchasing in a specific area to spread risk and minimise outgoings such as land tax which is based on the value of property in a state? How long do you plan to hold the property for? In what entity will it be purchased?

Once you are clear on what you are wanting from the property, how long you will hold it and in what entity you will hold it you will be better position to appraise properties. Look at comparable properties through the real estate sites online including median property prices and reports such as those available from analyst sites can give you significant insight.

Knowing the median property value of a location helps you set your negotiation position and ensure that you don’t over-capitalise on a property (spend more on it at purchase and renovation than it will actually be worth at the end of your investment timeline). If you are looking at a property from a renovation perspective and the median house price for quality finished homes is $500k, and you have found a renovation property that takes your interest, you need to quantify and budget how much it will cost to bring it up the standard of a median home in that suburb.

So, if the home is going to cost $80K to renovate and you purchase it for $400k plus costs of the mortgage, stamp duty, legal and other incidentals, you have to wonder if it is worth doing given the time, effort involved and holding costs involved remembering that interest and mortgage payments will still be required. If it was your first home and you were getting in the market that is entirely another thing. Instead, you as investor/renovator looking to create equity/profit.

We need to flip the thinking. We need to start with $500k being the median, take off the $80K (and we will talk about that shortly). If you are going to renovate straight away and estimate it will take 2 months that creates holding costs. Depending on what you want from the property it is likely that you need to get the property substantially less than $400k (think $360-380k) to make it a worthwhile project depending on what you want to achieve by doing it.

The variables in making projects work are the acquisition cost, holding costs, renovation costs, and time. Most experienced renovators/investors have developed spreadsheets that help them to determine the viability of projects.

For those that purchase a property that you can rent out to some point in the future when you want to renovate, you have more time to research, quote and may be able to undertake some works things with a tenant in place. This is a nice situation to be in but not always practical – but it can also allow the opportunity to negotiate rent in lieu of certain qualities to allow cashflow during the process.

One of the biggest factors and risk is the cost of renovation. If you get the renovation cost wrong and it can bring projects to a standstill as you run out of cash and the project remains incomplete or even if completed, runs at a loss. This is where skilled knowledge comes into play and having skilled trades provide estimates is helpful. Having a quantity surveyor provide expert opinion can be helpful when setting the budget.

The more assumptions you have confirmed or revised, the less unknown factors you have the more likely you are to have a successful project.

All of which in turn sets up future projects.

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