The before and after transformations on a renovation show can have its romantic bouts for an investor or a DIY reno-enthusiast. But delve a little deeper, and there lays a solid game-plan, the coming together of numbers, and a wisdom that can only be gained from experience. So, what does it really take to ‘buy, flip and sell’ a property in today’s market? And how do you avoid the common fumbles?
If an investor is going to buy into a humble property – shabby around the edges yet framed by a promising arrangement of bones – the return on investment has to be worthwhile or substantial enough to warrant the stretch of money and time that is to be funnelled into the ‘buying and flipping’ phases.
As director of Results Mentoring, Brendan Kelly shares from his experience, for someone who is approaching a ‘buy, flip and sell’ project for the first time; “if you don’t completely understand the fundamentals, it can be a recipe for disaster”.
“The romance of TV [renovation] shows like that is really appealing; they make it look easy, they make it look relatively stress-free. There are a lot of accolades and a lot of recognition,” Kelly points out.
“But for the first-timer not having ever done it before, the risks are far greater than they know. The risks live in the world that they don’t know about.”
So, how does one enter, and take the best first step towards success in the ‘buy, flip, then sell’ realm? According to Kelly, it’s by connecting with the right person.
“Let’s call it somebody who has done it before and done it well, a couple of times if possible, who is willing to share their time, to educate and support somebody else to do it,” he explains. “You have got to be able to see how hard it is, and learn from somebody that can see the dilemmas in the problems.”
A step in the right direction
As with all property investment strategies, the secret to success is in the numbers. Results have the potential to be mighty when the numbers are put to hard work, and this resonates no different to renovating on a tighter budget or going DIY.
If anything, it’s even more crucial to plan finances well in advance when going hands-on, shares Kelly.
“Most people don’t think money, they think dream and romance, and success and winning. They don’t see the process of managing money through. So, one of the traps is that they run out of money along the way,” Kelly says.
“Here is a rule: You need 40% of your buy price as cash to see the project through. If you are buying a $500k property, you need $200k in cash. You need to come up with a 20% deposit so that’s $100K, and the extra $100k is all spent on holding costs, renovation costs, and stamp duty and other expenses.”
For novice renovators, the amount of money that the investor thinks the renovation will cost usually needs to be doubled, according to Kelly – and the same goes with the time they think it’s going to take to renovate the property.
For instance, if you have a budget of $25k and a timeline of four weeks, you should expect to spend up to $50,000 and up to two months.
If DIY is added into the mix, the renovation process could be stretched even further, taking up to three times as long and costing an investor three times as much to execute.
“The reason it costs so much more is because they don’t have the tools and they don’t have the skill,” Kelly explains.
“When someone goes into Bunnings to do a DIY reno or a project, they have to buy, let’s say, plaster, or glue, or nails. [The store] sells to you in packages more than you need. So you are paying more than you need and there is always leftover, which you are likely to end up throwing away.”
The mentor also raises the additional costs that an investor has to be prepared to funnel towards the right tools for the job, and to obtain the necessary building equipment that they might not already have sitting in reserve.
On some occasions, this could mean buying a tool that they may end up using only once, for a specific job.
In a bid to save on labour costs, what might look to be minor add-ons in DIY costs can ultimately accumulate. Such is in the case of an investor having to pay retail price, rather than a discounted trade price for the in-store purchase of certain equipment and tools.
In addition, Kelly points to the changing nature of time.
“When you are actually doing the work on the DIY, you’ve got to learn what to do and then do it well enough to finish it. So, it might take you two or three attempts to get it right,” he shares.
“That will be a problem and it has the capacity to really erode profit, or maybe bring the project to its knees near the finish. The solution for getting your renovation right, is to determine the budget you have to spend on renovating before buying the project. Then, knowing that sticking to this budget gives you the best chance to make a profit, get the ‘biggest bang for your buck’ without spending a cent more than you promised yourself to.
“But unto itself, blowing your reno budget won’t actually cause the failure, or set you up to fail. What does set you up for a fail, absolutely, is not knowing the property’s realistic sell price.”
Know your competition
Whilst Kelly acknowledges that an investor should aim to create a property that is as polished as the rest of the competition on the market, the key is in the numbers.
“Whatever [price] renovated properties are selling for, you have to buy an unrenovated property for, at most, three-quarters of that price,” he advises.
“You need to understand the prices of houses in the market, in terms of unrenovated versus renovated.”
Kelly recommends investors to ask themselves: what does a renovated property sell for? And what does a renovated property look like in that area?
It’s also just as important to be aware of the target market, he adds, which is why investors must conduct thorough research on what people want or desire in a particular area. What is currently in demand in that suburb? And who is most likely to settle into the property?
“The answer to doing a good renovate and sell for a profit comes a long way before buying a property,” Kelly says. “Knowing and budgeting for all the numbers in the project from buy price to sell price, including a profit, before signing on the dotted line to buy it will be the difference between hoping you’re a success, and having the confidence of being one.
“The success of the first one is often supported more by luck than good management. But there is truth in the phrase: ‘fortune favours the brave’.”