How to make money from property - Renovating
Renovating is mainly for the more active property investors and to be honest, the majority of renovators aren’t making anywhere near enough money from this strategy to make it worthwhile. Have you ever heard someone say they’ve been renovating properties full time for 20 years and loving it? Didn’t think so, because it’s hard work for minimal returns. When you include all the costs and the cost of your time, you have either lost money or break even without realising it. Often it’s best to stay in your job and invest in a more passive investment or different property strategy.
This strategy requires you to purchase a property, complete renovations and sell the property at a profit. In South Australia, we have high stamp duty fees when you purchase which puts you $20,000 - $30,000 behind from the start. This is never a good beginning and hard to make up. If you do choose to renovate, focus on the following:
- You MUST purchase for the best price. If you pay too much you won’t recover and just because you were willing to pay more, doesn’t mean someone else will.
- Have a very clear plan of what you will renovate. Often people don’t plan and don’t have a detailed budget. This results in them going too far and spending money on renovations that they didn’t really need to do. Try to eliminate emotions and personal preferences from your decision making and focus on the figures and your Return on Investment. If you spend $5,000 on a granite bench top, will that add $10,000 of value. If not, don’t do it.
- Renovate to suit most tastes. Design and renovate to meet the tastes of the majority of people who might want to purchase the house. Preparation is the key, as you need to think who will purchase your house when it’s time to sell. Will it be a family, professional couple, investor or bachelor as each person will want different features. The more people you can get emotionally attached to the property, the more competition you will create when you sell the house and the higher the price you’ll get
- Bang for your buck. This is one of the most important things to get right. A valuer friend of mine is always astounded at how much money people believe a pool, or particular feature will add to the value of their home. The fact is, in most cases, in you spend $1, you won’t get $1 worth of value. This means you really need to be careful where you spend your money. Some of the best results are achieved from the kitchen, bathroom, master bedroom, painting and improving the living areas. These can all be done on a tight budget if done right.
- Do the work yourself. With high labour wages in Australia, it just isn’t profitable to get tradies to do all the work. Yes, there are certain jobs that need tradies, but use them sparingly. Pick up a brush and paint, pull down walls etc. yourself, lay the floating floor boards yourself. It will save you a heap of money!
- Get the right agent to sell your house. I’m not the biggest fan of dealing with agents to purchase a property, in fact I hate it. I hate the games and innuendo, but at the end of the day they are doing what’s best for their client the vendor. You need to find the best agent in your area who will work for you to get the best price. A good agent will know how to build competition and negotiate the best price. They will also advise the best strategy to sell the house in the current market, be it auction or private treaty. Don’t go for the cheapest agent as it may cost you $15,000 on a lower sale price.
So now you know what to do, here’s what to avoid doing. These are the most common mistakes we see by renovators.
- Insufficient cash flow to complete the renovation or to provide you with a life while you renovate. Have a buffer account, can be a separate loan account for holding costs/living expenses set up by your broker, or a savings account with money to get you through if something goes wrong.
- Over capitalising on the renovations. Know the area and what properties have sold well, in particular what spec and fit out quality the houses are. You don’t always need to go the highest quality fixtures and fittings which cost more.
- DON’T renovate in a flat market. If the market is flat or declining, the value you added will be lost in the down turn of the market or the stagnant market.
THE BEST POSSIBLE WAY TO MAKE IT WORK
The best way to make this strategy work, which isn’t practical for everyone, is to purchase and renovate your principle place of residence. The place that you live in, is capital gains tax (CGT) free when you sell it. This means you don’t need to pay tax when you sell the house if you have held the house for 12mths and lived in it the whole time. The money you make is Tax free!