Introduction Renovating for capital gain can be an effective way of boosting your property’s value, but should always be carefully considered, with all options and costs weighed up dispassionately. If planning to renovate for the purposes of immediate “value adding” to on-sell or revalue and draw-down equity, or if you are simply aiming to improve the state of a current property, there are important issues to consider. Keep in mind that property investment and renovation are not necessarily inexorably linked. If you are buying a property for trading purposes and plan to renovate and quickly on sell (known as a “fluff and flick” job), then the renovation is probably going to differ from that on a property which you intend to hold for a longer period of time. Whatever the situation, you shouldn’t feel a need to renovate, unless there are some strong reasons as to why this could be beneficial, and it can help you achieve your goals. Part one of this two-part article will explore the two primary reasons for renovating, and part two will offer some suggestions and practical guidelines on how to ensure that you get the most value for money, whether you are looking for rental returns or capital growth.
Renovating to on-sell Renovating to on-sell When adding value to “on sell”, it goes without saying that your profit is largely going to be in your buying. After carrying out your due diligence on your selected area and short-listing appropriate properties, your aim should be to purchase the property for the lowest possible price, after researching the market to such a degree that you can almost immediately spot a bargain. Naturally, effective negotiating skills and thorough market knowledge will assist you in securing a price that enables you to recognise that the property will readily resell for at least some level of profit after all costs have been considered. It’s crucial that you know who your likely target buyers are before you begin your search. Knowing the values of both un-renovated and renovated properties in your target area, would allow you to determine whether you could make a profit on a deal, or else you wouldn’t have set out on this path in the first place. Most property speculators who carry out such projects benefit, from the effects of a rising market, so it takes planning and an intimate knowledge of the current market to make gains in a flat or neutral market. Once you have established that potential gains exist for this type of renovation in a particular area, ask yourself the following questions: Who is my target market for this property? Identifying the buyers before you plan your renovation is vital. Buyers differ in their wants and needs when it comes to individual property. For example, young families are likely to be looking for spacious fully fenced yards and large well equipped kitchens, in contrast to retiring baby boomers who may prefer low maintenance properties within easy walking distance to services such as public transport and shopping centres. The easiest way to determine who your future buyer is likely to be is to examine the current area and identify the demographic groups who may want to live there. Research the demographics and observe who is most likely to want to live in the property that you are planning to improve. Real estate agents will be a great source of information, as they are in the market constantly and usually are on the ball with what buyers prefer and are seeking. What features will they be expecting and will they be prepared to pay a premium ? It is absolutely imperative that you conduct your research and be aware of what features are likely to add profit to your margin. If buyers in a particular price bracket expect such items as air conditioning, caesarstone bench tops and built in robes, then you must be prepared to invest in these items as you stand a great chance of recouping your costs and more. Be careful to ensure that you are not wasting money on features that you personally view as desirable. Some buyers may overlook or not be prepared to pay any more money for these features. Your aim should be to appeal to the widest group of buyers. Wherever possible you should ensure that features such as paint colours are practical and neutral, and that the renovations are cost effective and will increase your return. You don’t necessarily need to spend big dollars to create that “Wow” factor but you do need to know exactly what is likely to hit the buttons of any prospective purchasers. Inspecting the renovated properties and tracking their subsequent sales prices within your chosen area will give you a clearer idea of what type of renovation will make a difference. What renovations am I planning to do, at what cost and in what timeframe? Whether or not the changes are going to be large and structural, or instead purely cosmetic, include all renovation and holding costs, as well as buying, selling, capital gains, conveyancing and financing costs. Allow an extra 10% on top of your estimated renovating costs, as unanticipated problems can often occur during this stage. There’s nothing quite like uncovering problem areas to discover yet another layer of problems! It is important to add value as cheaply as possible, but to make the renovations appear classy, so be sure to shop around for good value material. If possible, do this before settlement to maximise your time, for supplies and tradesmen. Be organised and set a schedule, to minimise the time spent actually renovating. Also factor in your time, as time spent renovating by yourself can actually be futile if you could have earned an income in the meantime and outsourced the work for less. Be smart about what you physically can and can’t do, and make sure you know where every hardware store in your suburb is located – and what hours they are open! When things are going to go wrong, you can almost bet that it’s going to happen late on a Sunday afternoon! What about Tax? Remember that the 50% capital gains discount only applies if you hold a property for at least 12 months before selling. If your plan includes selling within 12 months of the initial contract for purchase – you need to include the extra tax you'll pay in your calculations.. Realistically factoring in ALL costs is imperative to your bottom line in particular where taxation is concerned. Although there can be tax concessions on property improvements in the form of depreciation, you should always consult professional advice before making your final decision. There are significant differences between what the ATO classifies as improvements and repairs, and it pays to be aware of these prior to any work being carried out. Timing the Renovation To speed up the scheduling process and to enable you to renovate more efficiently, consider asking for access to the property whilst it’s still in the hands of the vendors. A useful tip here is to add a clause to the terms and conditions in your contract of sale specifying the requirement for access. For example: If you can foresee that the renovation is going to be quite extensive then requesting a longer settlement period can also be to your advantage. Some owners are prepared to even allow some renovation work (eg exterior painting, gardening) to take place prior to settlement, but be sure to check this out first if it’s important to your plan. Most solicitors/conveyancers don’t like pre-settlement access involving renovations, so it ultimately depends on the individual situation. If you commence your renovation prior to settlement and the vendor dies, then the contract can be revoked. It is imperative that you obtain legal advice before proceeding down this road. Keep in mind that from the day of settlement you are paying out on this property, so every day after this time it is costing you. Being organised with tradesmen and suppliers can save time and money to ensure the project is finished on time and within budget. Many a property trader has underestimated the time period of a renovation and subsequent sale, and has suffered by having their holding costs wipe out any profit. You must be sure that, when completed, your property will appeal to a wide range of buyers who will want to pay a particular price (or more!) for the finished product.
Renovating to improve rental yields Renovating to improve rental yields Maybe you have had a string of comments about the poor state of the kitchen from prospective tenants which has ultimately led them to pass on the property, or perhaps there are some serious problems that are making the home uninhabitable. Whatever the reason, the key is to ensure that any renovating work done on an existing investment property will ultimately give you a return. It’s important to stress the difference between necessary maintenance and renovation work. As a landlord, you have a legal duty of care to ensure that your property is a safe and that you provide a well maintained living environment for your tenants. This will undoubtedly lead to you shelling out hard-earned cash from time-to-time on a number of items (eg hot water systems; appliance repairs; leaking roofs; plumbing woes; security locks; etc). These should be viewed as simply part and parcel of owning an investment property. Overcapitalising is the most common mistake landlords make when it comes to improvements. Poor judgments on what will add value often means that what you spend may never be recouped. Common problem areas include spas and new bathrooms, swimming pools or structural changes. Hideously expensive and time consuming work can leave you out of pocket. Before undertaking any major renovations ensure you conduct a thorough cost-benefit analysis to assess your return on the renovation. For example; A recent $2800 renovating a property resulted in a rental increase of $25 per week. This renovation will pay itself off in a lit tle over 2 years. This equates to a gross return of 46%. Property investors are also often faced with another dilemma when it comes to renovation – what to do with the tenants! If you are considering an improvement that will significantly disrupt the lives of the tenants, you may find that you will need to give them notice and have the property vacant for the renovation period. This will present you with a whole range of new issues such as how you will cover the lost rent while the work is being done, and the time it will take to advertise and place a new tenant. It is important to remember that if you need to give notice to your tenants you will need to do this within the guidelines stipulated by the Residential Tenancies Act within your state. In NSW, if the fixed term period of the agreement is due to run out, you can give 14 days notice to end the tenancy. If the fixed term has ended you must give at least 60 days notice. The notice must be in writing and you must allow four additional working days if posting the notice. Should you wish to renovate with the tenants still in place, be sure that you have appropriate measures in place to ensure the tenants are safe and not being disrupted too much by the renovation. Depending on the scope of works, you may elect to offer a discount in the rent during the renovation period, or some other incentive. Be very careful, however, as liability issues can present a real danger if your tenants can possibly cause injury to themselves during such works being carried out or take action against you for an unsafe living environment.
Practical Renovating Tips Practical Renovating Tips We have compiled the following list of property practicalities to consider, when value-adding. Please note that these are from our own experiences only and are by no means exhaustive! This is a great topic to discuss in a discussion forum – there is always someone else who has come up with or learned a great technique that you can apply to your own projects. Paint: my number one favourite and the feature most likely to give you the biggest “bang for your buck”. Freshly, well painted properties (interior and exterior) invite inspection and give off the aroma that someone has cared enough about a property to freshen it up. Sticking to safe modern neutrals is highly recommended, as well as ensuring that all trims (window and door frames, skirting, doors) are painted in the same gloss white or similar shade. Flooring: Whether or not you’re replacing existing carpet with something newer or polishing boards to their original condition, floors will be noticed. Be sure to put them on the list last, as you want to avoid messy tradesmen accidentally marking them. Windows: Ensure all treatments marry nicely and are streamlined, clean and allow plenty of light into the property. Timber venetians, holland or roman blinds remain a favourite with sheer curtains over the top, if required, to “soften” a room (eg bedroom) Again, go for uniformity with colour and consider privacy. Most blinds can be purchased cheaply from Home Decorator stores, and cut down with a hacksaw and a careful hand. However, even custom made blinds can be reasonably priced if you shop around. Light fittings, switches and power points: I prefer these to be all new and updated as switch covers are cheap and relatively easy to change. Don’t worry about any that will be covered with furniture (eg if you’re hiring furniture for the sale) but ensure that all visible switches are fresh and modern looking. Stick with white or the chrome look, depending on the type of property. Obvious repairs: Little things that buyers notice such as peeling paint, fine wall cracks, squeaky and sticky doors and windows, overgrown gardens, loose pavers, dripping taps, dodgy fences, holes in anything, flaking grout, water damage etc HAVE to be fixed or at least disguised, in order to make the first impression the most memorable. It also reduces possible bargaining power from a potential purchaser when you are ready to sell. During my renovating travels, I’ve found various handymen to be worth their weight in gold. The good ones are truly multi talented and can fix all manner of tasks in a much shorter period than I ever could have. Ask around for one who charges an hourly or daily rate. Depending on how much work you need them to do, pay them their rate and pay for all materials directly as they need to be purchased. Door handles: Including the front door, ensure all handles are appropriate for the property and in good working order. You may have to replace some or all of them, but ensure that uniformity reigns and they match ! Light: Ensure there’s enough of it pouring in at the right places and if not, consider skylights as they can make a world of difference to dark rooms. Kitchens: If you’re not replacing it, consider freshening it up by replacing appliances, repainting cupboards and replacing handles and taps. Even repainting tired tiled splashbacks can make an enormous difference, and I’ve used enamel paints to great effect doing this. Replacing bench tops can also be a beneficial exercise, particularly if the colour dates it easily. Bathrooms: If not replacing, consider changing over fittings such as taps, basins, wall cabinets, toilet lids, and towel racks to renew the bathroom. Consider installing glass panels in place of curtain rails around old showers and resurface existing bath and tiles. Resurfacing companies can make a bathroom look like new and are a cheaper alternative to retiling. Old baths can even have an inner bath mould made to custom fit and this is still cheaper than getting a new tub refitted. Storage: Though built-in-robes may not be within your budget, installing cheaper freestanding wardrobes should be considered if bedrooms are lacking storage space. Ensure the laundry has at least one cupboard and some shelving. You must also consider practical shelving or similar in the garage. Buyers need to be able to see where they can fit all of their current possessions into the property, so be sure that you think in terms of what you would need if YOU were going to live in the property. Outdoors: Tidy up all gardens and consider installing new beds if needed. Renew beds with fresh bark or rocks and plant some flowering or attractive foliage plants to increase colour. Even placing attractive temporary pot plants near entrances and around outdoor living areas can make a difference during the sale period. Cleanliness: is something you can achieve without necessarily spending a lot of money – especially if you are willing to put in some of your own elbow-grease, and it is very important with a property for sale. Ensure the glass sparkles; the tiles gleam and not a speck of dirt or dust remain for buyers to notice. Don’t overlook commonly missed places such as door and window tracks, garages and sheds, laundries, concrete paths (no oil stains), roofs, drains, fans, ceilings, behind the toilet (!!) skirting boards and exterior walls (such as cladding, weatherboard). Using high pressure cleaners can reap pleasing results and even discreetly placed air fresheners can add to the general scent of a property. Security: Like all of us, when purchasing property, we like to see that it’s secure and safe from possible intruders. To this end, consider installing window locks (cheap alternative) or possibly an alarm system. Check all flyscreens for soundness and replace any that are defective. Make sure deadlocks are all working and on any exterior doors. Ensure smoke alarms are installed and working effectively. Elderly residents, in particular, appreciate the extra safety factor of security doors, peepholes and heavy duty screens. Presentation: This only applies when selling, but consider hiring furniture and possibly a decorator to give you advice on how to professionally present your property for sale. Naturally, this will again depend on the area in which you’re selling, but having a house appropriately “dressed” can add to your profit significantly, in some cases. If you have flair yourself, use your own furniture and home wares to show off a property for sale.
Summary Summary Every renovation you plan should be for the benefit of a gain, whether or not it’s immediate in terms of profit taking or increased yield, or later on in the benefit of increased capital growth. Add the possibility of a well planned and executed renovation to your next purchase and you may just well be pleasantly surprised at what you gain! See also Discussion about this article Real Estate articles Real Estate discussion forum Commercial Real Estate discussion forum Investing Book reviews Glossary of Investing Terms
