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Is renovating an investment property a waste of money?

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| 16 Nov 2010, 01:07 AM Agree 0

I’ve always wanted to renovate a place myself but I’ve heard that quite often the amount you spend doing up the kitchen and bathrooms etc will cost you more than the profit you can make adding value. Should I think about adding an extra bedroom or stick to basics like a fresh paint job and landscaping the front yard? All advice would be most welcome! Thanks!
  • new investor | 16 Nov 2010, 05:04 AM Agree 0
    I've also been wondering if it was worth renovating before you sell? I've read somewhere that many buyers prefer to buy un-renovated properties! To me it seems less risky to not spend the money on renovating
  • patchy | 18 Nov 2010, 01:59 AM Agree 0
    In my view, it all comes down to two things: making sure that you will make money from whatever you do, and making sure your costs don't overrun.

    The first comes down to knowing your market and budgeting effectively. that a look at what reno'd properties go for vs unreno'd. If the difference is big enough to warrant the effort of reno - then cost out what you'd need to do. if the cost wipes out your profit, it's probably not worth bothering. if you can do the reno and still extract value, it's probably worth doing (note - extract value could either mean selling for a profit or getting a better rent return, depending on your strategy).

    Second - and more important - keep costs under control! reno costs can easily spiral and wipe out your projected profit. sometimes it's cheaper to get in the professionals than bodge it yourself, esp if it's more complicated than a lick of paint.

  • michaelconrick | 30 Nov 2010, 10:43 AM Agree 0
    I would have to agree with most of what Patchy has said. It's important to keep the costs under control. Don't over-capitalise. If a DIY Ikea kitchen and a 'tub-n-tile' bathroom makeover has the potential to increase the sale price and desirability of the property, then why not do it?

    It's also important to consider the timeframe in which you plan to sell.

    If you're going to sell immediately, chances of a new kitchen or bathroom resulting in a profit are probably unlikely, although they could make the property more appealing to owner-occupiers and lead to a faster sale, if that's important to you. Depending on the amount of similar properties on the market in your area, something like a new kitchen might help your property stand out in the crowd. Alternatively, if the house is a run down shanty on a big block and the likely purchaser would be a developer who will just knock it down, then any improvements would be a waste of money.

    If you're going to rent it for a good few years before your sell, then a kitchen and bathroom makeover would likely result in a higher rent and some depreciation benefits - of course, talk to your property manager and accountant for tax advice - and do the math to see if the investment is justified.

    Regards,
    Michael
  • Lisa Parker | 08 Dec 2010, 01:46 AM Agree 0
    Hi Kerry & New Investor,

    I agree with Patchy and Michael and all of their points, if the property is likely to be sold to a developer don't worry about improving. If the house is in a family or first home owner area improvements can definitely pay off.
    The areas that sell a property are usually the kitchen, bathroom and an outdoor entertaining area, such as a deck. Bathrooms and Kitchens are the most expensive part of the reno, but like Michael said, DIY Ikea kitchen and Tile & Tub bathroom are really inexpensive fix's that create a lot of value.

    I persoanlly have simply changed door handles and painted the tiles and cupboards in a kitchen and added white wooden blinds and changed a light fitting all for less than $400. The value added was approximately $20,000.

    Cheap changes can add a lot of value, here are my DIY cheap reno tips for improving value and getting a higher sale price

    Inside:
    Get rid of old light fittings, replace with modern
    remove unnecesary doors in hallways etc
    change door handles on internal doors and cupboard doors usually brushed ss good
    In most instances, paint wooden frames white/off white
    Paint walls off white, ecru or similar (a dulax colour consultant is worth the $130 if unsure..always go neutral)
    re carpet
    wooden blinds add value (depending on house, I usually go for white) off shelf usually cheaper, you may need to get them cut down to size only $20 per blind
    new vanity in bathroom
    tub and tile bath, shower and tiles
    replace taps to modern variety
    Clean windows

    Outside:(first impression - this is where buyers can really get emotional, if the front is inticing they are usually super excited to see the rest)
    If the property has a front fence, make sure it is painted and in excellent repair (first impressions)
    Paint concrete on front rear porches and add a large pot with colourful blooms of deep green rich folligae
    weed garden beds, replant with cheap yuccas or grasses or larger varieties depending on size and scale of land, driveway etc
    Fresh mulch
    Sweep and tidy front and rear yard, keep mowed throughout selling period
    Plant up sides of walk ways, driveways
    render brick if appropriate
    paint weather boards if approriate

    Staging through sales campaign:
    Clear all clutter away from benchtops (toasters, utencil containers, etc)leave only things that add a bit of colour and a design deatail
    Clear as many personal items from walls, display cabinets (photos etc)
    Edit, Edit, Edit...this means get rid of as much additional furniture as possible, leaving only the basics so it feels large and people can begin to imagine their own furniture there
    Put vases of fresh flowers on entrance hall tables, dining tables or kitchen benchstops
    use fresh, new towels and floor mat in bathroom (here is an oportunity to inject some colour)
    Use a professional staging company and hire furniture if you are not sure, buyers often can not visulaise how the property is going to look with the right furniture in the house, if you have old furniture or a very specific style that not everyone will appeal to, it is a good idea to get a house staging team in to help out. Most agents will agree that home staging really gets the house presenting at its very best ensuring the highest possible sale price and fastes sale period.
    Get professional photo's taken - poor photos can kill your campaign becuase if it doesnt appeal on line people wont bother making time to inspect
    Add a light to your for sale board
    Put outside lights and lighting up driveway on at night throughout sales campaign


    Naturally, the above suggestions are based purely on my own experience and you will have to conduct your own research as to the viabilty of the suggestions. I work with Melbourne real estate, every state will have it's own add value differences and style that people go for.

    Oh yeah, one word EBAY
    Hope this helps :-)

  • new investor | 09 Dec 2010, 11:55 PM Agree 0
    Hey Lisa,

    Wow thanks for all of that! In your professional opinion, is renovating an apartment as advantageous as renovating a house?

    And when you said that the most emotional part of the process was seeing the outside, does that mean that a really nice apartment in a really ugly building is going to be hard to sell?

    Sorry if these are stupid questions
  • Lisa Parker | 13 Dec 2010, 02:34 AM Agree 0
    Hi New Investor,

    I think people are far more forgiving of the outside appearance of an apartment block, providing you have all the other fundamentals covered (proximity to lifestyle attractions, transport, distance to CBD, Balcony, great floor plan etc etc).

    You can increase buyer competition by applying all of the above (preious post) reno tips and picturing the interior on the real estate websites rather than the exterior. You can add you own touched such as a great welcome mat, a nicely painted front door and perhaps some plant pots at the front door if appropriate.

    Stay away from really bad blocks though, at the end of the day you have very little control over what the body co will and wont do to improve the exterior. Sometimes you can be lucky enough to find a unit where a "special Levy" has been struck for future planned works. This means teh body co could have $40K in the bank to improve the exterior which is a real bonus to you becuase you havent had to contribute to the cost of the works, the previous owner has already paid for it.

    Be sure to read teh body co notes section in the Section 32/Vendor statement, it will detail any issues that need money spent, how much money is in teh kitty and if there are any proposed works. I like to call the body co manager and ask a lot of questions as well.

    Happy investing, I am very excited for you
  • new investor | 13 Dec 2010, 03:47 AM Agree 0
    Thanks again Lisa! Sorry to keep asking questions, but what would you define a really bad block as?
  • patchy | 16 Dec 2010, 10:01 PM Agree 0
    hehe - you might be better off defining a GOOD block. The newer the better for units imo. Although that does sort of remove the need for a reno...
  • Lisa Parker | 01 Jan 2011, 02:48 AM Agree 0
    Really Bad block: Busy street, 2nd rate suburb, street with too many run down apartment blocks, few redeeming features to outside of block, sometimes painted a terrible colour, no blacony, size of windows disproportinate to building, no nicely kept common facitlities. Or the motel style apartments that are low lined attached villa unit type housing made of bessa block.

    There are exceptions to every rule, so this is just a general idea, once you begin your search you will very quickly work out what is better located and a good block and what is not. (If your face screws up the minute you pull up out the front its a fair sign it's not good )

    If I find any example along the way I will post!

    Happy New Year Everyone!
  • Ben Kingsley | 11 Jan 2011, 12:40 PM Agree 0
    Hi Kerry,

    Firstly, if your goal is to flip the property, then you need to be concious of what renovated property similar to your is selling for, so you don't over capitalise. Thats when you don't make money. Do your research.

    If its a buy hold property and the amentities within the property (Ie Bathroom and Kitchen) are in reasonable condition - JUST PAINT IT. Don't spend any more money and start getting the rent in to help you pay for it.
    In 6 months get it re-valued by your broker or managing agent and see what equity might be there. If there is esimate to be enough there, then subject to borrowing power and cash flow situation, get that equity out for the next step in your wealth building strategy.

    Ben Kingsley
    QPIA
    PIPA Board Member
    Founder Empower Wealth
    www.empowerwealth.com.au
  • Mick C | 07 Feb 2011, 12:34 PM Agree 0
    I’ve always wanted to renovate a place myself but I’ve heard that quite often the amount you spend doing up the kitchen and bathrooms etc will cost you more than the profit you can make adding value. Should I think about adding an extra bedroom or stick to basics like a fresh paint job and landscaping the front yard? All advice would be most welcome! Thanks!



    I was told by a succfuly property developer " The heart is where is the money is, You make it feel like "home" and you can't go wrong" .
    If you make renovation that gives the palce a more of a home feel, a place YOU would want to live in- you are sure to create a bit of capital growth.

    Lastly all renovations are tax tax deductible, and you can add it to the base cost when calculating Capital gain tax( ask your accountant)

    Good luck and have FUN!

    Regards
    Michael

  • Jeremiah | 23 Mar 2011, 01:07 PM Agree 0
    Renovating is always a good idea - except if the property is already in tip-top shape. The way I see it, it's the same thing as with girls and make-up - if a girl knows how to present herself, she's a winner! If you implement the same philosophy to your real estate, you'll be a winner too.
  • Searching | 09 Jul 2011, 05:17 AM Agree 0
    ALL renovations tax deductable??!! I think not....I read somewhere they are only if it s rented at the time.

    I am not sure and would love to know as all I have seen so far are renovated apartments that are too small,or big older run down apartments that need 50 thou spent on them.

    Does anyone know? Anyone here an accountant?

    Found a great apartment(they are asking to much at the mo) but it needs lights,paint,new bathroom,carpet...and prob a kitchen! Nobody has made an offer prob as there is so much work to be done and it would suit owner occupier better.
    The renos I woukd need to do would take 2 months...so thats 2 months 0 rent.

    I want capital growth and to neg gear and reduce my tax.
  • Mick C | 11 Jul 2011, 01:22 AM Agree 0
    ALL renovations tax deductable??!! I think not....I read somewhere they are only if it s rented at the time.

    I am not sure and would love to know as all I have seen so far are renovated apartments that are too small,or big older run down apartments that need 50 thou spent on them.

    Does anyone know? Anyone here an accountant?

    Found a great apartment(they are asking to much at the mo) but it needs lights,paint,new bathroom,carpet...and prob a kitchen! Nobody has made an offer prob as there is so much work to be done and it would suit owner occupier better.
    The renos I woukd need to do would take 2 months...so thats 2 months 0 rent.

    I want capital growth and to neg gear and reduce my tax.


    In basic terms; ( go to ATO- Div 40- capital work for more info)

    When not rented out/not under lease - the item/ renovations can be "depreciated"once it is on the "market" to be rented
    When it's rented out/under lease - Can claim back from tax

    So tax deductible both ways; but using diff method- i been doing this way for years and my accountant + ATO is fine with it (...any accountant care to confirm or deny?

    Regards
    Michael
  • Searching | 11 Jul 2011, 01:41 AM Agree 0
    Thanks for that. Depreciation isnt going to be great. The only way I can see around it is to lease it, ask tenants not to move in,compensate them somehow,then get them to move in after all the renos have been done. Technically thats legal? Is it?

    This place needs carpet/paint/new bathrom/lights and prob a new kitchen!!!
  • Mick C | 11 Jul 2011, 01:50 AM Agree 0
    Thanks for that. Depreciation isnt going to be great. The only way I can see around it is to lease it, ask tenants not to move in,compensate them somehow,then get them to move in after all the renos have been done. Technically thats legal? Is it?

    This place needs carpet/paint/new bathrom/lights and prob a new kitchen!!!


    Have the place on the market- ie sign the agreement with your real estate agent- that's enough to confirm it's an investment- it does not technically need to have a "tenant living there" as such...as long a you have the tenancy agreement signed up with your agent this is the form you provide to your accountant + ATO.


    Example: if i have my place up for rent and it does not become rented for 3 month ( low market?) i can still claim the interest..because it's still an investment- no tenants that's all- the ATO uses common sense and it's all based on your "intention" and what paper proof you can provide.

    Regards
    Michael
  • Searching | 11 Jul 2011, 02:08 AM Agree 0
    oh wow. I thought there would be a way around it. Yes that makes perfect sense. Now I have to see if I can get the asking price down by 80 tho!!!

    It really is in a deplorable state,but a great spot....plus lets face it,there is time effort and work to be done on it.

    Hopefully the ato dont get picky about receipts for works done of such a vast amount all at the same time??...worried face
  • addicted | 14 Jul 2011, 05:00 AM Agree 0
    I want capital growth and to neg gear and reduce my tax.

    So you WANT to lose money to lower your tax?

    If you buy a place that needs work (under market). Do the reno. You now have instant CG AND you won't be negatively geared (well maybe a little).

    Legally it's not just having a tenant agreement in place. The property needs to be AVAILABLE for lease. If you are renovating it isn't really available. But it is used by a lot of people.

    Before you buy anything that needs a reno you need to do your costs to work out whether it is viable. Including materials, paying tradies and holding costs.
    You are WAY OVER quoting on $50,000 to renovate a 2 bed unit.
    If you can do some of the basic stuff yourself you can cut that in half (easily).
    Rip out old kitchen, bathroom, carpet, paint yourself.

    If you don't need plumbing moved the bathroom will be $5K max. Kitchen $5K + stove etc. Carpet $2K. We did new bathroom, kitchen, paint whole house with only tradies for bathroom and installing kitchen in 5 weeks (while we worked full time jobs).

    Ask if you need help with anything.
    • sarah | 13 Oct 2014, 06:25 PM Agree 0
      Hi Addicted,
      I was wondering where you were renovation your properties? I am in South East Melbourne and want to flip some properties I am doing my initial research to try and find the correct suburbs.
      Thanks Sarah
  • Searching | 14 Jul 2011, 06:38 AM Agree 0
    Thanks. I cant do any of the renos myself. I am overseas most of the time,jet lagged,and I am a shift worker! 50 K may be over the top,I am thinking worse case senario. Just spoke to a new accountant,briefly,will make time to see him. He seemed to think lease for 12 months ..then do reno as repair. Its a big apartment. I am thinking 6 for painting (roof also),2 carpet,5 bathroom...(really thats possible)?,500 lights(its dark),10 kitchen...needs new stove,dishwasher,sink the lot...,curtains 500,robes,2000. So yes by your estimates it should be a lot less.

    Now I just have to hope I can buy it for the right price.
  • Elea | 27 Jul 2011, 03:19 AM Agree 0
    I also agree. Renovation is a good idea.

    Good luck to you!

    Elea
  • Ava Marie | 22 Feb 2012, 06:23 AM Agree 0
    Well there's a good and bad side of renovating a house. renovating will definitely increase the value of your home, but make sure to spend wisely and just replace what is really needed to be replaced, and which will make your house looks more beautiful.
  • jalarcon | 23 Feb 2012, 02:50 AM Agree 0
    You have to examine carefully at the total cost for renovating and the profit. This is how anyone can determine what to do with any property. Thanks for asking this thought-provoking question here at http://www.yourinvestmentpropertymag.com.au
  • dylannme | 01 Mar 2012, 01:03 PM Agree 0
    Thank you for sharing this to us.
  • hassan | 06 Mar 2012, 11:55 AM Agree 0
    Different countries real estate business quickly develop in different ways especially in Dubai because Dubai is international city and quite center of the world hence most authorized companies come here take real real estate business.
  • anishkumar854 | 23 Mar 2012, 07:27 AM Agree 0
    If you renovate your home for selling so it’s not a good way to sell your property and totally wastage of money.
  • william levi | 30 Mar 2012, 08:28 AM Agree 0
    Renovating investment property is an important thing when reselling homes. It is not wastage of time and money. It is most important element of increasing rental income.
  • Bennett | 04 May 2012, 05:28 AM Agree 0
    My top ten reasons, in no particular order, are as follows:-

    1. Renovations are expensive

    Herron Todd White valuers (the firm for which I work) estimate that the cost of renovating is approximately double per square metre when compared to building a new dwelling.

    The comparison gets even worse when considering more complex works like first floor additions. See Homedesigndirectory.com.au's Construction Cost Estimator

    Builders will charge a premium for the greater risk involved in working on a site when a property is occupied, access is often much more difficult, there is often remedial work or extra site preparation costs involved and there is greater risk of out-of quote costs.

    There are almost always unforeseen issues with old houses.

    2. What about the other costs?

    It might seem rather obvious but the associated costs in flipping substantially erodes what might otherwise be a tidy profit.

    Clearly flippers are up for Stamp Duty and agent's fees but solicitor's fees, capital gains tax, removalists costs and mortgage interest charges are conveniently left out of the conversation by exuberant flippers whose favourite past-time is to exaggerate their windfall.

    3. Labour costs

    Flippers rarely take into account the cost of their own time.

    They could be using that time to earn money being employed elsewhere or in some other endeavour.

    To gain a clear picture, this needs to be factored into the business case.

    Nobody works without pay and flippers are no exception.

    4 Over-capitalising

    Renovation funds need to be spent judiciously - it is simply not always the case that a dollar spent is a dollar of value added. One example is that you might spend $90K on a detached studio but whether buyers are prepared to add that much extra to the sale price is highly questionable. Choosing overly expensive finishes is also a trap for young players.

    5. Un-renovated properties are expensive to buy

    Shows like The Block have made renovating very popular, especially for financially constrained young couples who feel their only option is to allow their dream home to evolve through hard work, over time.

    So these 'raw" properties are bound to attract far more buyer attention inevitably driving up prices.

    Will the finished product attract the same competition? I doubt it.

    6. Opportunity cost

    In finance speak the "cost of capital" is crucial in determining feasibility.

    Given that flippers spend a lot of money up front and won't see the return until they sell the property it is essential they understand what return one's money could yield if parked elsewhere such as in long-term deposits or the stock market.

    7. Flipper or the market?

    What flippers never seem to talk about is how much they would have sold their property for, had they not even so much as lifted a finger.

    Mostly, flippers are simply not entitled to claim the full difference between purchase and sale price as something they engineered.

    To analyse the profitability of renovating properly one needs to strip out the natural increase in capital value due to market forces.

    8 Market instability

    This is a massive uncontrollable risk. Flippers will often buy, renovate and sell in a short period of time.

    Any short term volatility caused by elections, stock market weakness, monetary policy and the like, could jeopardise the whole exercise as holding costs are costly.

    9. Heartache, marriage counselling, injury, stress and take-away food

    All that blood, sweat, tears, hair-loss, arguments and living through months of dust surely must come with a price tag.

    I am sure the reason why medical centres are open on weekends is because of flippers.

    10. Council issues

    In built up urban areas renovators are constantly frustrated by everybody from pesky objecting neighbours to overly officious town planners leading to extra costs such as additional draftsperson and architects fees.
  • AuPropertySpectator | 07 May 2012, 01:42 PM Agree 0
    Renovating is not a waste of time, providing you do your due diligence before you even begin any physical work.
    The real capital gain you'll make out of a renovation project is usually decided before even a single lick of paint is given, or any work is done, for that matter.

    The bulk of your work should be focused on cost analysis, spreadsheets, sourcing multiple quotes for materials and then labour. But this is not where the number-crunching ends. You then need to decide if it's to be a 'flipping' property (so, buy, renovate, then resell as fast as possible), or a 'renovate and hold' property. In either instance, do your projected capital gain sums, and if it's a flipping property, calculate selling costs, capital gains tax, and holding costs during the course of the renovation. If your projected profit is still decent, then pursue it. For renovate and hold; calculate (and get quotes) for what the rental return would be, once completed, then see how this affects the monthly holding-costs for keeping the property. If this is positive, then the reno project is worth pursuing.

    There are plenty of investment strategies when it comes to property investment.

    Cheers,
    Cameron McEvoy
  • silverbullet | 23 May 2012, 04:37 AM Agree 0
    I believe that renovating is a waste of money..
    Because renovating trend is always changing. so We can't always change when people want new one.

  • addicted | 25 May 2012, 07:18 AM Agree 0
    If you replace things it can not be deducted as a repair.

    Your accountant should know that.
    If you repair the kitchen (ie paint the doors etc) it's a repair. If you replace it, it is not a repair. You can claim depreciation though.
  • JohnBroderick | 15 Jun 2012, 05:35 AM Agree 0
    Renovation is a good idea...It may increase the value of your property. Also it attracts the customers and buyers to itself. I am also preferred a renovated home..

  • digital1234 | 18 Jun 2012, 11:26 AM Agree 0
    For this post i want to say that i got a lot of the information , which i need , this is a great information , this information provide the knowledge of the investing and renovating in the property . but i need some information about the property how to we can use property in best vaue.
  • kelvinjay | 02 Aug 2012, 06:39 AM Agree 0
    Renovating investment property is an important thing when reselling homes. It is not wastage of time and money. It is most important element of increasing rental income.
  • kelvinjay | 16 Aug 2012, 12:32 PM Agree 0
    Renovating, investment property is a not wastage of money but you should make sure you know the rental market in your property’s area and budget and look at the rental prices of both renovated and unrenovated properties.
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