Reno And Profit In The Current Market
With many Perth houses and apartments still selling for less than their purchase cost ten years ago, it's understandable that some investors believe it is too risky to 'flip' houses right now. But I believe that there are always glimmers of hope in every market.
Sydney and Melbourne now seem to be experiencing some of the pain that the Perth property market has felt over the past few years. The mistaken belief that property values double every seven to ten years has really stung a lot of Perth property owners. With many Perth houses and apartments still selling for less than their purchase cost ten years ago, it’s understandable that investors believe it is too risky to “flip” houses right now.
But I believe that there are always glimmers of hope in every market.
Most property investors will have heard Warren Buffet’s advice “to be fearful when others are greedy and greedy when others are fearful” but what does that really mean? Allow me to illustrate this by sharing with you my recent renovation project. By seeing an opportunity in a suburb and price range that others feared, my JV partner and I were able to make a tidy profit and a great return on our investment.
Ascertain supply vs demand in your suburb
One way to initially gauge supply vs demand in a suburb is to check the number of properties sold over the past year vs the number of properties currently on the market. I like to keep a spreadsheet recording the supply vs demand information for my target suburbs each month. By updating and checking this data regularly, I can see when demand is starting to outstrip supply. This then allows me to cash in on the increasing demand for a renovated house in my chosen suburb.
Although most of our capital cities are experiencing declining values, if you purchase in a suburb where demand is outstripping supply, understand the true end value of your renovated house and appeal to your target demographic, you should have buyers eager for your property.
For this project, I chose an older suburb where the number of houses sold over the past year was twice as many as the number that were currently on the market. This indicated that there were plenty of buyers in the suburb purchasing properties and not enough stock by comparison. If I stuck to my budget, and my renovated product appealed to the target market, I would be able to sell quickly and for a profit.
Work backwards from your expected end sale price
Understanding, and confidently estimating, your end sale price allows you to “be greedy while others are fearful.”
Having this confidence certainly takes the fear out of the process, even when non-educated investors (based on what they are reading in the media) are telling you it’s a terrible time to buy property.)
For this project, I started with a clear end sale price in mind and worked backwards from there. This allowed me to ascertain exactly what the purchase price of my project needed to be.
By combining my knowledge of supply vs demand with my confidence in the end sale price, I was able to purchase at a price that ensured a profit would be made.
Target your renovation to the ultimate end buyer
There is no point buying in a suburb that has great demand, creating a beautifully renovated home and offering it for sale if it doesn’t appeal to the target demographic for the area.
For this project, I knew my target buyer would be a first home-buyer who would fall in love with the character features but appreciate the modern conveniences of air conditioning, a functional kitchen and modern bathroom.
By installing a new white glossy kitchen, we were able to appeal to the modern buyer whilst highlighting the beautifully polished jarrah floors.
The lounge room became a serene space by keeping the colour scheme neutral, allowing the character cornices and polished floorboards to be the heroes of the room.
The spacious master bedroom, with its character cornices and floorboards, was always going to be a selling point. Knowing that our buyer would be a younger person, and possibly a shift worker, we were able to create a desirable space that had the benefits of air conditioning, a roller shutter and a built-in wardrobe.
The median house price for Perth is $510,000. The median house price in this suburb is less than half of the city’s median at only $232,000. The return on cost for this project was a solid 20%. What’s even better is that this return was achieved in just 3 months. I am a firm believer that if you research well and understand your target market, you can be greedy while others are fearful and find gold in all sectors of the market.