Renovation can make you big bucks within a short period of time, if you get it right. But with the current high property prices, how do you make it work? Your Investment Property asks the experts for their top tips on how to renovate for profit in the current market.
If you’re wondering if renovation is a viable strategy in the current market, the answer is yes, it is. It’s also viable in any market as long as you stick to the golden rule: you make profit when you buy.
Granted, that may be harder in a hot market, but it is still possible. There are always opportunities out there; it’s just that you have to work harder to find a project that stacks up profitwise.
But keep in mind there is not just one Australian property market – different cities and regions are at different stages in their property cycles. If you’re finding it difficult to secure renovation projects with good profits in some places, it may be that you need to look in other areas.
Hayden Folbigg, mortgage adviser at Smartline Personal Mortgage Advisers, reveals his top tips on what to buy, what deal breakers to watch out for, and how to finance your renovations to help you maximise your profit.
What to buy
Always buy in a desirable location for homeowners
Whether you’re buying a property to live in or as an investment, where you buy is of utmost importance. You want a property that is close to transport, shops/cafes, and schools. Ideally, you want to be in an area where the prevailing demographic is homeowners rather than renters as the homes around you are more likely to be well maintained. Homeowners are also more willing to pay more for properties.
Look for a property that is structurally sound
Even if you’re looking to carry out a substantial structural renovation, you still want to avoid having to deal with termites or underpinning foundations. Make sure you get a pest and building inspection done.
Avoid properties that require big reno if you’re on a budget
Avoid properties that will require you to spend money on things such as fencing, stormwater or rewiring as they can be costly, time-consuming, and don’t give you the visual ‘bang for your buck’ that you’re looking for.
Look for properties that can be fixed quickly and cheaply
If you are doing a cosmetic renovation, you want a property that requires the least amount of work so you can get in and out quickly. You want a property that is in an original and/ or poor condition that can be rectified with things like paint, new carpets, appliances, new kitchen and bathrooms and a good clean-up.
For structural reno, always buy with land component
If you’re looking to undertake a structural renovation, you want a property that essentially has land value in a good position – the old ‘worst house in the best street’. But avoid houses on major roads, under flight paths or very close to train or tram lines. You don’t want to purchase a property in an undesirable area with poorly maintained houses around you and lots of vandalism or graffiti.
If possible, aim to buy and sell in the same market
If you take too long to do the renovation, you may find that the market has changed significantly. This can be a positive if property prices have moved up, but could hurt you if prices have pulled back. If you buy and sell in the same market, you have more certainty when calculating your end sale price.
How to finance your renovation
Funding a basic cosmetic renovation project
If you already have equity in your own property, you can take out an investment loan for the whole amount of funding, including the deposit, buying costs and renovation, from your own equity plus the value of the new property.
Alternatively, if you already own the property you’re looking to renovate, you can take out the required funds for the renovation from the equity you may have in that property.
There are two ways to do this. The first way is to cross-collateralise the two securities and take out one big loan to cover all funding. The second is to use a line of credit.
This is when you use another property as collateral to borrow to buy and renovate a new property. This means you have now tied up two properties together. Many investors avoid this strategy because of a few downsides, including borrowing limits and the lack of flexibility down the line.
2. Line of credit
The second option is to use a line of credit against your home to cover a 20% deposit plus all purchase costs and the renovation costs. You then raise a stand-alone facility at 80% against the investment property.
The second is generally a better option if you’re looking to sell the property and move on to another renovation project. The line of credit against your home will be retained for the next one, and going forward all you will need to do is raise 80% lends against the new purchase.
This avoids the cost of lenders mortgage insurance, which can be significant and eat your profits.
Funding a major structural renovation project
Things you need to know
Lending for significant renovations has become a little tougher of late. The majority of lenders will want a fixed price contract from a licensed builder. They will only lend on a completion valuation, so you will need to have all your costings done up front.
• Some builders will only work on a cost-plus basis. There are just a few lenders that will lend on this basis, and there generally needs to be over $1m in construction costs.
• You will need to have significant equity in the property or another property as lenders will not allow the overall funding to go above 80%.
• Fixed-price contracts do give certainty on price and timeframe but can be more expensive as the builder needs to allow for contingencies.
• In contrast, a cost-plus build is the cost of the materials and labour plus the builder’s margin. With cost-plus contracts, build timeframes seem to run over expectation, and variations are more common.
Hayden Folbigg is a mortgage adviser at Smartline Personal Mortgage Advisers.