Renovating for Profit: A Capital Idea!
Monday, May 26, 2014
Clint Eastwood once made the observation that ‘a man has to know his limitations’. While he wasn’t referring to property facelifts, those considering renovating their home or investment property should heed his words. Renovation is a tricky subject. The best renovations are highly profitable; they will make your day. The worst will break your bank.
I am not a renovation kind of guy. I’d rather sell the house and uproot the family, before adding a lick of fresh paint to a wall or a pergola to a garden. In fact, if I hadn’t spent the best years of my life working with the English language, I’d probably have to check the dictionary to make sure I spelled pergola correctly. So while I have no interest in renovating, ten plus years as a business editor means I do have an interest in taking a common sense approach to renovations. Common sense equates to profitability and I am all for people making a profit.
One man who is full of common sense ideas is Chris Gray. Gray is the CEO of Empire, the host of Your Property Empire on Sky News Business Channel and the financial judge on Channel Ten's The Renovators.
“When it comes to renovating, most people think they can make money even in a flat market,” Gray says. “They watch TV shows and see people becoming wealthy – at times easily – and they think they can emulate what they see. It usually doesn’t pan out that way. Renovations should be made via an excel spreadsheet, not on emotion.”
In other words, don’t buy the extravagant lamp for $500 when you can buy an equally aesthetic one for 50 bucks.
Patrick Bright is another who understands that people should be aware of emotion when renovating for profit, particularly if they have been inspired by television shows. By watching The Block, you may actually do your block!
Bright is the founder of EPS Property Search, he says “Reno shows don’t show the real cost of the renovation. They don’t take into account the full rate of tradespeople, all labour, the actual work the contestants did, council costs or the money won for a winning room. It should all be taken into account, if not you lose money. People watch these shows and believe they provide a recipe for success. But they are made for entertainment.”
Of course, this is especially important for people who are borrowing to renovate.
To these costs, Gray adds stamp duty and sales tax to the list. As a judge on a renovation show, he knows all too well the pitfalls and urges people to set a budget. By setting a budget, you will minimise the risk of overcapitalisation, which is the renovator’s worst nightmare. Nobody wants the cost of his or her renovation to exceed the market value.
“The key to renovating on a budget is to work out what the budget will be. I often advise people to have the bank come to the home and value the property. Once the valuation is done, get the valuations officer to go through your renovation plans. Then work out what the home is worth and whether your renovation plans will cost you more than you are likely to make.
The Real Estate Institute of Queensland (REIQ) offers a simple formula to minimise the risk of an overcapitalised property, while actually adding value.
“First of all, note the price you paid for the property, add the expected total cost of the renovations, add another five per cent for landscaping and you have the cost of your house and improvements,” says REIQ managing director Dan Molloy.
“Let’s say the total cost is $510,000. Next look at houses in your street and check newspaper real estate ads featuring nearby homes.
“If there are no homes valued as high as the $500,000 mark, then you are probably overcapitalising. Only proceed with the renovations if you plan to live there for the next eight to 10 years, or if you’re confident your suburb will be the next to boom.”
Bright suggests that only 20% of people get this right. And it is not just overcapitalisation that is a problem, many people undercapitalise as well.
“If people buy a property to flip and they believe they can sell it for $1 million, then they need to purchase the property for under $850,000 and spend $150,000 on the renovation,” Bright says. “However many people try to cut the cost of the renovation. They pay $100,000 rather than $150,000. They conduct a low cost renovation that doesn’t match the standard most people expect and the property is then worth less than the $1 million they wanted for it. It’s only worth $950,000 because someone installed a Laminex benchtop not a Caesarstone.”
The key is to buy at a good price with margin, or buy a good quality property that has been sourced well and negotiated to your benefit.
Gray offers the following tips.
- Speak to a real estate agent and ask what buyers are looking for because one suburb is different from another.
- Find out what tenants would like: appliances, stone fitting etc.…
- Find out what real estate agents are saying about the area.
- If renovating on a budget, see what you can buy that is discounted, discontinued or even available from e-Bay (if you feel safe about hackers).
- When using tradespeople and builders, make sure they have legitimate licences. Ask for references and go out and see the work they have done. Quite often the cheapest builder will cost you more money, not less.
- Pay a project manager to oversee the project so that people don’t take you for a ride.
Renovation may be an exceptional way to make money for mot much effort, however you have to keep your numbers in check and know your limitations.
Note: Full REIQ article can be found at: http://institute.reiq.com/REIQ/Consumer_information/Consumer_cols/Sellin...