By CHERIE BARBER
It’s unanimous, renovating is one of the most aggressive forms of property investment today. It’s an active property strategy that relies on a person buying an under utilised property, transforming that property cosmetically or structurally and in the process of doing this, adding value that increases one’s net equity in the property at a highly accelerated rate.
It’s a fast strategy for those who want to create their wealth in a rapid timeframe and this premise alone is what drives hundreds of thousands of everyday Aussies to embark on a renovation project, either as owner occupiers or in a professional capacity. For most people though, their biggest enemy is lack of experience. Unfortunately this often translates into a lack of profit.
If you follow these simple dos and don’ts of renovating, you’ll stand a much better chance of making a good profit.
SET YOUR STRATEGY
DO cement your strategy in place before you start any renovation project. Will you do a quick cosmetic renovation and make a small lump sum profit margin or throw yourself into a full-on structural renovation for a larger slice of the profit pie? Are you renovating to improve the comfort and appearance of your own house? Are you renovating to improve the rental returns and attract a better quality tenant for your investment property, or are you renovating to sell immediately upon completion and make a lump sum profit for cash flow?
- Structural cracks
- Rising damp
- Plumbing and gas leaks
- Outdated electrical wiring
- Excavation works
Getting your strategy clear in your head is essential and this needs to be done as early in the project as possible. Ideally you need to know this before you purchase the property. The way you renovate your prop erty can depend on your strategy. For example, quality fixtures and fittings are far more important in a renovate-and-sell project as opposed to a renovate-and-rent product where budget, durable materials will suffice.
DO know which suburbs have a better chance of success than other suburbs. Suburbs can gen rally be described or given a specific profile, with some key profiles more lucrative than other suburb types. For example, in inner-city fringe rings, three to 10 kilometres out from the main central business district, village suburbs that feature a café society, boutique shops, giftware shops and the like are known as ‘lifestyle suburbs’ and are gold mine investment spots for renovators, whereas transport corridor suburbs in metropolitan circles are promising for those with more modest budgets.
DON’T spread your wings too far and chase unrenovated properties across too many suburbs. Doing this will not only consume more of your time and energy but will also restrict you from gaining an intimate knowledge of your local market. When it comes to renovating, remember these two old adages: ‘become a master of one, not a jack of all trades’ and ‘less is more’. Focus on a small cluster of suburbs, ideally located geographically close to each other. Focus on one thing and do it well. This intimate suburb knowledge will be what delivers you a profit margin at the end of your project.
DO know your local market. It’s crucial you know the area as well as the potential buyers, before you buy a property for renovation.
Aside from knowing the property styles within your suburb, you need to research the demographics of your preferred area.
Free suburb and demographic reports are in plentiful supply these days on the internet.
Alternatively, do it the old fashioned way; jump in your car and drive around the streets of your local suburb. Sit in local cafés and shopping centres and people-watch to determine the types of people coming and going in your target suburbs. Understanding the demographics within a suburb will help you predict where demand lies, simply by knowing what buyers need and want. Real estate agents are often a good source of information on who the local buyers are and which types of properties are in high or low demand.
DON’T rush into an area or type of property just because you like it. Never get emotional about a property, make decisions with your head, not your heart. Those that remove emotion from the equation and treat their renovation projects in a business-like manner normally make the most money.
DO thorough due diligence on a property before entering into a contract of sale. Don’t take someone else’s opinion or theory about how good a suburb or property may be. It’s your money and ultimately your responsibility to do thorough research before you buy. At first glance, many properties appear to be diamonds but can secretly be duds when you dig down and investigate further.
Research the location, physical, environmental, regulatory, financial and legal due diligence aspects of a property to ensure no major buyer objections are present that can’t be overcome.
DON’T skimp on a building and pest inspection. This is a basic due diligence task that will uncover building defects and damage caused by pests on your potential property purchase. Certain building issues can be expensive to fix and can instantly wipe out reno profits in one foul swoop. Be aware of structural cracking, rising damp, outdated plumbing and electrical systems, inadequate roof coverings and downpipes as well as structural support changes. These are all expensive to upgrade without any visual benefit to the property. It’s a smart business practice to know these things before you buy which in turn can give you good leverage to negotiate the price down even further with the vendor.
DO negotiate the price down as much as possible but do so in a way where your offer isn’t viewed as plain old ridiculous. Submitting outrageously low offers to agents will diminish your credibility to the point where they won’t want to deal with you again. In the world of real estate, agents can often be your best friend so maintain good respect for each other and submit offers at a fair price that stacks up for you as a renovator. Use creative negotiations such as extended settlement and immediate access to make the deal work more in your favour.
DON’T sign the contract of sale and not utilise the contract settlement period effectively. Average settlement periods (i.e. the time when you enter into a contract of sale to buy a property to the time you settle and become the official owner) typically range from 30 to 90 days in Australia. Many people exchange contracts but do nothing while they’re waiting for the property to settle.
For renovators, a great deal of tasks can be done during the settlement process that effectively cut down the number of days in your project, post settlement. With finance holding costs a fairly major cost component for renovators, shaving a week or two or four off your project can mean a few extra thousands of costs saved. Again, improved profits.
Cosmetic renovators should negotiate one or two access visits to the property between exchange and settlement to obtain quotes and line up good tradies who need advance notice. Also spend this time to buy all of your fixtures and fittings so as to have everything ready for when your project starts. This will eliminate you having to be offsite during your renovation, a critical time when you really should be there to quickly sort out issues that arise. For structural renovators, the initial contract settlement period can be used to get a head start on the council approval process too.
DO be diligent with your time management, as many renovators under estimate how long a renovation and sale can take and how easily holding costs can eliminate any profit. You have to adhere to strict time lines if you want to renovate for profit. A complete cosmetic overhaul on a property shouldn’t take any longer than six weeks in total.
DON’T rely on your builder to have every thing under control. Many builders work on multiple projects at a time and may not have their fingers on the pulse as closely as they should. This can cause timelines to drag out and thus increase project costs. To avoid this issue, hold a weekly work in progress meeting with your builder to ensure timelines are being met, problems resolved quickly and advance thought is being given to long lead time items such as windows and doors to ensure your project doesn’t come to a standstill. Many new renovators are unsure about the tasks and sequence of construction necessary, so rely on their builder as project manager. This is fine as long as you monitor their activities to ensure work progresses smoothly and errors are minimised.
DO know your budget and stick to it. As a general rule of thumb, 10 per cent of your property value should be set aside when undertaking a cosmetic overhaul of a property. For example, a property that’s currently valued at $500,000 should have a budget of $50,000 to transform the property. To save budget blowouts, have detailed plans such as electrical and plumbing layouts for tradies to work to and accurately quote from, as variations later on in the project can be expensive and result in budget blowouts. Be disciplined enough to keep a track of your costs as you progress through your project each week. If you’re over budget at the end of week two, negotiate even harder in work three to get yourself back on budget. People often crunch the numbers at the end of a project, but it’s too late to change anything and get back on budget when your project is complete.
DON’T just accept the first quote. Like any other business, aim to get a minimum of three to five quotes for any significant piece of work in your project. Far too many tradies submit quotes at inflated prices. Multiple quotes give you the ability to get a feel for what the true cost of the work should be.
This is especially important when you don’t know the true cost of something yourself.
DO monitor quality throughout the course of your project and ensure tradies are working to the standard you expect of them.
Use common sense in this regard also. A country property under $200,000 in value doesn’t need the five-star treatment. Quality should always be in sync with the value of property being renovated. Whatever your budget, buyers aren’t stupid these days. A property with numerous defects will struggle to sell, full-stop.
DO consider which type of building contract you sign and enter into. After all, it’s a formal legal agreement referred to in a court of law should a building dispute arise between parties. A fixed-price contract with your builder will make it easier for you to stick to your budget but will usually mean you pay a slight premium to have this assurance. A cost-plus contract provides you with a little more flexibility and insight into the whole process as you should receive a full list of building items, however you run the risk of costs spiralling out of control if the job blows out of proportion, a common story many people across Australia experience with builders. Different jobs suit different building contracts, so ensure the building contract you sign errs in the favour of the consumer, not the builder.
DON’T assume the building contract is only pro forma or just for your lawyer. Make sure you read it extremely carefully, line by line, to fully understand what’s included, what’s not, project deliverables and expectations of both parties. Also ensure your contract has a penalty clause in case your builder can’t deliver your project on time. This helps a renovator recover some or all of the holding costs associated with your project running over time.
DO clearly communicate with your tradies to ensure they fully understand what they’re being hired to do and the expectations you have of them. This lack of understanding is the fundamental reason why renovation horror stories exist. The solution is simple – a scope of works document. This acts as the brief for the work to be done. Spend time working out what tasks you want your trades person to perform and document this formally on paper. Having a clear scope of works will enable the contractor to give you a more accurate cost on the work to be per formed.
DON’T spend too much money and time fixing things buyers can’t see, particularly in cosmetic overhauls. Changes need to be highly visible to add perceived value. There are changes that add real value to a property and deliver the highest return on investment.
Painting tops the list, as does replacing flooring, window coverings, cement rendering and updating kitchens and bathrooms in whole or part. There are numerous ways to renovate without spending unnecessary money.
DO make sure you present your property in the best possible way to your potential buyers. Always double-check your agent’s marketing to ensure all the information is correct. Don’t assume agents always get it right. Check all written marketing material (such as newspaper and online ads) as well as the agent’s printed handouts like the property brochure. You’d be surprised how often essential information is left out or incorrect.
For open homes present your home perfectly and consider hiring furniture (called property styling). Property styling gives a property life and creates an illusion that emotional buyers are lured into.
DON’T just hire the first real estate agent you see. Like any occupation, there are lots of great agents but lots of bad ones too. Make sure your real estate agent knows the market well, has experience with the type of property you’re selling, has a reasonable size database with suitable buyers and is extremely professional and friendly all the way through.
Insist your real estate agent communicates news of all interested parties and offers at any time.
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