Conceptually at least, renovating houses for a profit should be easy. You buy low in the market, apply a few fix up touches, and sell or rent out the property for a killer profit.
“In today’s investment climate, renovating for profit is one of the only ways to manufacture both capital growth and cash flow,” says Patrick Bright, Buyer’s Agent and author of The Insider’s Guide to Renovating for Profit.
“With property renovation, you’re in the driver’s seat. Rather than just sitting back and waiting for the market to deliver capital growth over time, you have the opportunity to accelerate the process by manufacturing capital growth.”
Bright also warns that renovating is not for everyone. Fortunes have been made and lost in the residential renovation game, and the difference between the winners and losers is not always as big as you might think.
“Many people think doing it right only comes down to how well you can pick colours or arrange the kitchen. What really matters is how well you can spot an opportunity and if you’ve done enough research to forecast your profit margin correctly.”
Renovations expert Rebecca Yarrow concurs. “It’s what you do in the research and planning phase that makes a renovation succeed or fail. If you don’t have an eye for what a renovated property will sell for in its market, you’re likely to overcapitalise and make a loss.”
Selecting the property
After finding a suburb, the next step, according to Bright, is to look for which type of properties in those suburbs are likely to outperform the market – whether they be houses, units or terraces. After this, your priority is finding a property that will lend itself to a renovation, without requiring you to overcapitalize.
How you figure this out is purely a numbers game. “When you assess a property deal, start with the end in mind: what you will be able to sell the property for when it’s renovated. You then subtract the original purchase price and the renovation costs, including the costs of holding the property during renovations, and you’re left with your profit margin.”
An awareness of these numbers should guide your renovation decisions and, ultimately, which property you buy, says Bright. “For any property you’re thinking about renovating, you need to be fully aware of how much work is needed, how much that work will cost and how much the renovated property will be worth on completion.”
Cherrie Barber, director of Renovating For Profit, suggests spending at least 12 weeks attending open house inspections. “You should aim to look at about 100 properties. It requires a lot of self-discipline, but it is one of the best ways to get a feel for what good and bad prices are.”
A good idea is to target properties with obvious defects, or properties that don’t meet current tastes and fashions for living. Archicentre’s Victorian state manager David Hallet says houses that don’t conform to an ‘open-living’ style are often worth a look. “If you can find a house that’s been well-built but badly renovated, you can often find that by reorganising the walls and windows within the fabric of the building, you can actually get a 21st century home at an affordable cost.”
If you are considering renovating a unit, Brendan Kelly of Results Mentoring suggests a building with a well-maintained exterior that has tired 70’s or 80’s style fittings on the inside. “The building should be structurally sound, but have décor or trimmings that are out of date.”
Measuring the property up
Once you’ve got your eye on a property, its time to make extra sure that you are getting exactly what you think you are paying for. Before you sign a contract, you should carry out a number of inspections to avoid buying a lemon.
The most important is getting a pest and building inspection done. “If it turns out the house has a termite problem, quantifying the cost and extent of the repairs required upfront will be difficult, so it’s essential that you get the inspection done,” says Yarrow.
Yarrow adds that if an inspection reveals major structural problems, its best to stay away. “When you’re starting out as a renovator, it’s best to stick to renovations that are not structural. Depending on what you plan to do, these projects are expensive. They also often require council approval and there’s the risk of not getting those through in time.”
Judith Taylor of Property Women suggests writing a renovation checklist of all the things to look at. This includes guttering and floorboards and, if it’s an older house, the wiring and the plumbing in particular. Even after satisfying this checklist, she recommends adding 10% to your estimated reno budget for contingencies.
If you’re renovating an apartment you’ll need the complex’s strata report. Double check what the stipulations are for carrying out a renovation on the property and make sure there are no severe limitations on what you are allowed to do. If the strata also indicates an above average amount of maintenance is regularly being conducted on the complex or building, be cautious and try to do further investigations.
Getting the best price
One of the central principles of renovating for profit is that you buy well. Like you would with an unrenovated property, your ability to negotiate with vendors and real estate agents will help you to get the best possible profit.
Bright recommends looking on the asking price as almost irrelevant. “(It’s) usually an optimistic figure that the vendor would like to receive, or an inflated figure that the selling agent told them they could achieve in order to win their business.”
He says that finding out the vendor’s motivation for selling will have a big impact on your ability to negotiate the original asking price. The vendor’s reasons for wanting to sell usually determine how flexible they are and how likely they are to give you a good deal.
Something to consider is making an offer on the basis that you will get reasonable access to the property during the settlement period. This will allow you to conduct the necessary property inspections and give you more time to lay the groundwork required for getting renovations done. To reduce holding costs, Bright advices aiming to start working the day after settlement. “Have all your quotes locked in before the keys are handed over,” he says.
Managing the reno
One of the main decisions you will need to make is deciding who will manage the project. Many people may decide to manage the project themselves, but Yarrow says that anyone considering this option should know exactly what’s in store for them. “Managing a reno project can be very time consuming, so it’s often a good idea to hire a project manager.”
Regardless of how hands on you are in managing the renovation, the success of the project will be based upon good preparation. This means always planning for contingencies and checking the progress of the renovation work everyday. Keep and file every transaction and piece of paper you use to keep track of time and dollars spent.
Barber suggests always getting three to five quotes for any project over $1,000. “Most people get one or two quotes from tradespeople, but then they have no benchmark to measure them with. It’s rare that all five quotes will be way out prices, and once you have a couple of quotes, you can bounce each tradesman’s prices off the other to negotiate a better deal.”
Of course, the most important consideration in managing the project is to stick to the budget. Barber suggests being prudent down to the last dollar. “Most people get to the end of a project and realise they’ve spent $70,000 when they only intended to spend $40,000. That’s why it’s necessary to constantly track your expenses. If you realise you’ve gone over budget one week, negotiate extra hard with tradespeople and suppliers the next week to get that money back. Every dollar you save is a dollar you earn.”
Barber also suggests finding a one-stop shop for all your materials. This allows you to negotiate bulk discounts, but she says it’s imperative to shop around first. “Get a number of quotes, and like you would with tradespeople, bounce those quotes off each supplier. Tell them you need to buy in a hurry: ‘your competitor has given me this price – what can you give me?’ ”
She adds that it is a lot easier to negotiate on the phone. “I like to go to shops to choose brands and models that I might use, just to develop a shopping list. Then I leave and talk to the supplier on the phone instead. I find suppliers are a lot more to the point this way. In the store, they like to size you up to see what prices they can get away with – on the phone they know that you’re only after the best price. This makes haggling a lot easier.”