Expert Advice with Kate Forbes 04/052018

 

Making a profit renovating a property seems like a very attractive proposition.

Buy low, renovate cheap, and add substantial value is the aim of the game.

It sounds simple enough, right?

While there is always strong demand for renovated properties – as there are always people wanting to move into a property that has been renovated and looks fresh and finished – there is a strategy involved in profitably transforming a ho-hum dwelling into something spectacular!

First of all, it begins with deciding why you want to renovate in the first place.

At these times of lower growth in some markets, renovating is a solid strategy to manufacture capital growth.

But it’s how to plan to harvest that growth that really matters.

Many people believe they’ll be able to renovate for profit with a buy, reno, sell strategy, but as most property flips flop, I’m not a big advocate of this technique.

Instead I prefer the strategy of ‘buy, renovate, rent out, refinance and repeat’…

If you renovate with the intention to retain property, then you stand to retain all the benefits you’ve created in the renovation.

This includes:

•    Low vacancies – As your newly-refurbished property is now attractive to a wider range of potential tenants, who are generally willing to pay a premium for better quality housing.

•    Higher rental returns – Receive higher rental as your newly improved asset shines against its competitors.

•    Depreciation benefits – Second-hand properties may attract fewer deprecation claims since the Federal Budget in 2017, but once you renovate you gain the tax benefit of extra depreciation allowances.

Using this strategy, you can essentially build your asset base, create capital growth and increase your overall wealth.

This is distinct to a flip or renovate to sell approach, which involves losing big amounts of money by potential paying Capital Gains Tax, plus stamp duty on the next property.

With this is mind, here are 10 steps that I believe will help you on your way to a profitable renovation strategy:

Before the renovations: Planning

Step 1: Get council or body corporate approval

Find out if you need council approval – or body corporate approval if the property is in a unit complex – before you begin renovations.

You may not need approval for interior renovations, but if you plan to move walls or erect new structures as part of your renovations, then they may require council approval.

There are certain rules that govern what you can and can’t do in a body corporate scheme as well.

There are penalties and fees for failing to apply for correct permission, and the council can even force you to un-do any renovations that have been completed without approval – so skip this step with caution!

Step 2: Do your research

Before you begin doing the work, do your homework.

Research current design trends, looking for tips and advice about renovations that will stand the test of time, appeal to modern tenants and won’t date the property.

What’s the demographic of the area?

What’s the particular style of the neighbourhood?

Where is the best place to park your renovation dollars in a way that will improve amenities and aesthetics to generate the best bang for buck?

Step 3: Work out your limitations

It goes without saying that you will need to work out a budget for your renovations.

This should include materials and labour, and also a miscellaneous fund for unexpected repairs and jobs that go over budget.

A good rule of thumb is spend no more than 10 per cent of the home’s value on renos, with the kitchen renovation coming in at about two per cent.

Limitations are not just financial: they can also include time constraints and stress.

Be realistic about how much you can take on every week as a project manager or DIY renovator, accepting that problems can also arise during the renovation process – and these may take extra time than you initially bargained for to rectify.

Step 4: Hire experts

If you’re handy on the tools, you may be planning to do some renovations yourself – but there will always be aspects of the job (such as electrical work) that require an expert hand.

Work out early in the piece which experts you would like to hire, and start arranging quotes.

Best practice is to shop around and obtain at least three quotes.

The renovations

Step 5: Entrance

An appealing first impression is the beginning step to attract tenants' (or eventual buyers') interest.

A paint job can quickly and effectively refresh the look of your house, with updated trims in a modern look that won’t date your house.

You can also spruce up the driveway using paving paint, refresh the lawn with turf if needed, and fix up fencing.

The little things count here, too, such as updating the letterbox, installing new modern outdoor lighting, and affixing new house numbers to the house.

Step 6: Painting

As well as a fresh lick of paint on the outside of the house, a revamped paint job inside can make all the difference.

Gone are the days of splashing dark or brash colours as feature walls to grab attention – bring in a light and earthy look with warm, neutral tones that allow the tenant to add their personal touch.

Step 7: Flooring

Flooring is an affordable way to transform a property’s look and aesthetic.

Whether you replace the carpets with fresh flooring underfoot, or pull up them up to install hard-wearing laminate floorboards for a cleaner, more open look, your investment in flooring will always deliver an impact.

Step 8: Kitchen and bathroom

These are the two main areas of renovation that will chew through your budget.

Without outlaying a ridiculous amount, you can refresh an existing kitchen with an updated colour scheme, a more modern bench-top, maybe even different handles on the cupboards.

Bathrooms can likewise be updated in colour to something light, bright and airy, though darker floor tiles can hide the dirt and stray hairs.

As a money-saving idea, you can tile over the top of an existing tile floor to avoid the cost and hassle of ripping up the old floor.

Step 9: Finally, it’s the little things

Sometimes, just replacing small fixtures and fittings can make a difference – for instance, updating taps, door handles, lights and ceiling fans can really produce the "wow" factor.

For a modern and brighter look, single hanging bulbs with hard-to-dust shades could be replaced with recessed down-lighting.

Dated door handles and taps can be replaced with more efficient and attractive versions, and sleek silver ceiling fans are an affordable fix to uplift a living room.

Finally, replace dark curtains with modern blinds that make the room appear brighter and less dated.

Post renovation

Step 10: Rent out, revalue and repeat

This is the part of the process where you can truly celebrate a job well done and cash in on all of your hard work!

In due course (but not straight away) you'll be able to refinance your property, to gain equity and "rinse and repeat."

That's the way to grow your wealth through property – not by flipping, paying tax and stamp duty so you can start all over again.

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Kate Forbes is a National Director at Metropole Property Strategists. She has 15 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a chartered financial analyst (CFA).

She is a regular commentator for Michael Yardney’s Property Update    

 

Read more Expert Advice from Kate here!

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.