Sunday, November 19, 2017

The do’s and don’ts of renovating for Investors

Today we have been lucky enough to have our post written by Adam Smith, a Home Loan/Property Editor from Finder, Australia's largest home loan comparison website. Please read on for some fantastic tips on renovating for Investors. Take it away Adam.

When you’re investing for a capital gain, you can either wait for your property to gain in value at the whims of the market, or you can take charge and add value. Renovating for investment can be a great way to build quick equity in your property. Then you can either sell your investment property for a profit, or hold onto it and use your newfound equity to build your property portfolio with another investment home loan.

If you’ve decided to renovate to add value to your investment property, there are some important guidelines you should follow to ensure your renovation doesn’t go off the rails.

DO find the right property in the right location
When you’re choosing a property to renovate, there’s a balance to be achieved between a property you can add significant value to and one that will eat up precious funds just to bring it up to a liveable condition.

You’ll be far better off choosing a property that needs cosmetic work more than structural work. Look for properties that are move-in ready, but need a good update to bring them into the 21st century.

You’ll also need to pay attention to location. Look at suburb trends for capital growth. Pay particular attention to suburbs with good transport links, top-notch schools and plenty of amenities like cafes, restaurants and green space. Obviously, these suburbs are going to have a higher entry point to buy. But if you find a property that needs some work, you can score a bargain relative to other homes in the area, and then add enough value to see a tidy profit.

DON'T overcapitalise
When you’re financing your renovation, make sure you don’t stretch yourself beyond your means. It’s likely you can see a return on your investment from some savvy renovations, but this isn’t guaranteed.

Make sure when you invest that you’ll be able to make your repayments in the long-term, even if you’re forced to hold the property for many years. Likewise, make sure you can afford your repayments if you decide to hold the property. Adding value is of little use if you put yourself in dire financial straits and are forced to sell before you’re ready.

DO budget more than you think you’ll need
Running out of budget before your renovation is complete can be catastrophic. You either end up with a house that’s not ready for market, or you end up seriously over-extending yourself.

You can avoid this by over-budgeting for your renovation. In general, it’s a good idea to budget an extra 20% on top of the costs you’ve already calculated. This additional 20% allows you to be prepared for unexpected developments, delays or cost blow-outs.

Remember that you’ll need to budget not just for the renovation, but for the purchase of the property. You’ll need to take into account costs like your home loan deposit, stamp duty, solicitors fees and other government charges. Then you’ll have to budget for trades, materials, any council development approval fees and interest on your home loan during the renovation. On top of all that, add that 20% contingency fund.

Building your renovation budget can be a stressful task. This renovation calculator can help alleviate some of the stress by helping you crunch the numbers.

DON'T underestimate the amount of time it will take
In addition to running over budget, most renovations are likely to run over time. If you’ve watched shows like The Block, you’ve seen people pull off entire room renovations in a week. In the real world, this just doesn’t happen.

A good rule of thumb is to allow 6-8 weeks for every $80,000 you spend on your renovation. Assume that the timeframe could blow out by several weeks, and plan accordingly.

DO focus on renovations with a good return
As mentioned above, buying a house that needs a lot of structural work is unlikely to be the best return on investment. Potential buyers don’t pay attention to details like a new roof, footings, wiring or plumbing. If you’re forced to sink money into these repairs, you probably won’t recoup your expenditure.

Instead, focus on renovations that add the most value and make a property more attractive to the average buyer. Kitchens and bathrooms are always huge selling points for houses. New fixtures and fittings are relatively low cost, but can completely transform the look and feel of a room. Even something as simple as a fresh coat of paint can significantly increase a property’s appeal, and, subsequently, its value.

DON'T make your design too niche
When you’re deciding on design elements for your renovation, stick to an aesthetic with broad appeal. Bold design decisions may look cool, but they also limit your buyers’ market.

Keep your design modern, clean and somewhat conservative. You want your design to have broad enough appeal that a wide swathe of buyers could imagine themselves living in your property. Trendiness will appeal to a particular sort of buyer, but timelessness will appeal to everyone.

DO have realistic expectations
Ultimately, most of the "dos and don’ts" of renovating for investment purposes come down to setting realistic goals and expectations. Putting thought and planning into your renovation can help you achieve some healthy profits, but it’s important to keep your expectations realistic when it comes to the time, money and stress involved, and the profit you’re likely to see.

Before you begin to renovate, have a look at similar renovated properties that have sold recently in the area. This can give you a good idea of what sort of return you can expect. Once your renovation is complete, reassess and see how yours compares.

Renovating as an investor can be a rewarding experience, or it can quickly spiral out of control. The preparation you put in beforehand will determine which path your renovation takes.

Thanks Adam for the do's and don'ts. I hope you have taken as much information from this post as I have.


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