Whether you’re about to embark on your first renovation or you’ve done a few in your time, here’s what you need to know to get it right and make it profitable. Vicky Gemmell
Learn to see with your mind, not your eyes
For the savvy property investor, there’s bounty in beautification.
Imagine you view a property described by a real estate agent as a “renovator’s dream”. As you walk around, examining the peeling paintwork; battling though clutter; avoiding the swampy bits of carpet, what do you see? A bio-hazardous dump? Or an opportunity brimming with potential?
A successful renovator-investor has the ability to glimpse potential beneath a façade. If a cluttered, unattractive property has good bones – just as with a tired or ageing face – a quick cosmetic renovation can work wonders.
A property’s potential, like a mirage in the desert, is your unique vision. Your task is to make real that vision in the eyes of a valuer or a tenant.
Begin by determining your strategy
The basis of renovation is the creation of value. Enroute to value creation, there are two paths to choose: renovate and sell, or renovate and hold.
If you intend to sell the property post-renovation, you want to create equity by increasing the property’s worth and to impress the valuer and potential buyers.
Alternatively, you might decide to hold onto your asset and rent it. Your goal here is an increase in rental return. You want a potential tenant to move into the house thinking, ‘This is fabulous, I’m getting a great deal’.
In both instances it’s important that the cost of the renovation is less than the increase in capital value of the finished product.
Different properties suit different strategies. It’s important to understand your personal strategy and to plan for it. That way, when you go shopping for the right property, you’ll choose one that suits your approach. You must ensure that you only buy something to which you can add value. Go property shopping armed with the knowledge of exactly what you’re looking for and cherry-pick; never settle for second best, or something that doesn’t fit all your search criteria.
Roll up your sleeves and do the research
Buying the right property at the right price is the indisputable key to success with this investment strategy. To maximise your investment return, you should try to buy below market value. Naturally, every other potential purchaser is also looking for a great deal, but as an investor, you have an advantage: you can buy without emotion. After all, you aren’t going to live in the house; it’s simply a money-making object.
Finding the right property involves investigation into a likely area’s demographics; proximity to amenities (eg. public transport, parks, schools, shops, good coffee); past capital growth; likely future capital growth and median house prices.
Look also at the same information for the surrounding suburbs. If you go to every viewing or auction in an area over a period of a few weeks, you’ll get a good indication of the true value of properties there. This will help you to spot a below-value property at once.
Cosy up to agents
Often undervalued houses don’t appear in property ads. In your search for the worst house in the best street, don’t waste your time looking in the glossies. The type of property you’re looking for may well be the one the agents don’t want to put their names to.
When approaching an agent, do so with a detailed, specific request. Nobody walks up to the information counter at the supermarket and says, ‘Please sell me food’. First you make a list, so that you know exactly what you want. Then you locate each item in the correct aisle. The same is true when you’re shopping for a renovation property. You need to identify precisely what you want, for example:
• brick property
• three bedrooms
• on a block approximately 700 square metres
• priced between $X and $Y
Were you to walk into an agency with such a list, having also pre-arranged your finance, the agent would sit up, realising immediately that you mean business. It’s this manner that will get you onto real estate agents’ hot lists, whereby you’d be the person they call before the For Sale signs go up.
Nurturing good relationships with real estate agents can make your search infinitely easier. Make coffee contacts by taking the agents out of the office for a chat over a latte. Give them wine at Christmas. Make sure that when your criteria for a property are matched, you’re the person they call first.
Never forget, however, that not every seller uses an estate agent. It’s worth also employing word-of-mouth to make your interest in property known so that people tell you about new opportunities coming onto the market. Let your accountant / lawyer / dentist / hairdresser know; one of them might have a client with a property to sell.
Network and enlist team players
A superior investor is someone who knows how to invest in people. As you network, you’ll surround yourself with a team to ease your endeavours on the road to success.
Your first recruitment drive will unearth the players you need to help you acquire your renovation property, including:
• Financier – bank, broker or investor (brokers are useful because they know all the rules for all the banks so you don’t have to research things like where exit fees are lowest for quick turn-around projects.)
• Real estate agent, buyers’ agent
Your next team is the one that makes the project happen. You’ll need contacts at the council for building permits and of course, builders, designers and tradespeople to help with the meat of the matter: the renovation itself.
Make the most of settlement time
Once you’ve found your golden egg-laying goose, you’d like it to start making money as soon as possible. Preferably, the property should start earning before you have to pay too many outgoings. This becomes practicable if you use the settlement time to your advantage.
If you negotiate a long settlement and obtain the seller’s permission to renovate before you complete, you can do the work and get the property back on the market without incurring a single mortgage charge. (Remember you only start repaying your mortgage on settlement.)
If you manage to re-sell before you settle, your outgoings will include stamp duty, legal fees and the renovation costs. Capital gains tax will also apply because you haven’t held the property for 12 months and therefore won’t be eligible for the 50 per cent discount. This can be quite hefty, depending on the size of your profit.
Perhaps you intend to hold on to the property? In this case, you can use the long settlement to renovate and arrange tenants before you complete. This way, your investment starts washing its face from day one.
To negotiate a long settlement, you and your solicitor need to be determined and creative. For example, you could make three separate offers: $300,000; $315,000; and $330,000. Each offer would correspond to a different settlement time: 30 days, 60 days, and 90 days. You could also vary the deposit amounts in relation to settlement time.
Your contract would have to include a special condition to give you access to the property and renovate it before settlement. Of course, you would take over holding costs like electricity, gas and insurance, but these are minimal in comparison to mortgage payments.
Your determination and creativity must be strong enough to overcome obstacles. For example, if there are existing tenants in the property, you could offer them cash to leave early. Offer to pay for the removal vans. Find them another rental property. Begin negotiations by asking, ‘What do you want?’ If you can provide the answer and it’s to your advantage, give it to them. Do whatever it takes to get into the property and start work.
Focus on budgeting and planning
There are no factors more crucial to a successful renovation than strict budgeting and meticulous planning.
In terms of budget, you need to exercise the self-control of a supermodel. Know exactly where each and every dollar goes, and ensure you spend wisely. Draw up a budget at the beginning and stick to it, allowing for a maximum fudge factor of 10 per cent.
Apply this 10 per cent fudge factor to your timing, also. Consult with everyone involved in the project and plan it day by day. Make checklists and update them religiously. If you go over time, it will cost you to hold an empty property before you can rent or sell it.
Plan also exactly which aspects of a property you decide to renovate, and how to go about it. Your abilities and budget will determine factors like whether you DIY, employ individual tradespeople or engage a property renovation company.
Create an illusion of expense
Whether you intend to sell or rent your property, you want to create the impression that the house is worth more than you’ve actually spent on it.
When it comes to valuation, it isn’t only land and room sizes that count. The valuer also considers things like tap ware, doors, handles, paint, floorboards, window furnishings, tiles and light fittings. While a tenant doesn’t necessarily take all these issues into account, the general impression created by attractive fittings is immeasurable.
The secret to creating an expensive illusion is to buy good fittings at the best price. (Never buy cheap fittings. Not only do they have a shorter lifespan, their second-rate veneer is irredeemable.) Don’t go to your everyday stores; look further afield for the same stock at better value. It’s entirely possible to buy $20 doorknobs that look like $90 ones.
When you’re looking for bargains, remember outlets like Spotlight are excellent for blinds and curtains and much cheaper than a specialist company (provided you have standard-sized windows). Also, you can buy virtually anything you need – fixtures, appliances, building materials – at auction. Explore www.ebay.com.au, www.graysonline.com.au or www.fowlesauctions.com.au to see what’s available.
Make a great first impression
Since you only get to do it once, it’s worth getting the first impression right. Here are some tips to gladden the eyes of potential purchasers or tenants:
• Smarten up the garden with a little pruning and some bright bedding flowers. Try using black mulch instead of brown. Black brings out more of the green highlights of grass and provides a better contrast to other colours. Scatter some pot plants to add more colour.
• Create a welcoming entrance by ensuring the render and exterior paintwork is intact and presentable. If necessary, give the front door a clean or a lick of paint. Make sure it opens easily; a fiddly lock is counter to a hospitable impression.
• If your budget allows, consider a remote-control front door key. This kind of a whizz-bang feature is something that will make your property stand out from the crowd. It’s one agents, buyers and prospective tenants will remember. If your prospective buyer or tenant is a housewife who juggles children and shopping, she’ll be particularly impressed.
• When you take up carpets, be aware there’ll be a gap at the bottom of the door, with a strip of light showing underneath. It doesn’t cost a lot to buy a new door (which is a cinch to paint and much easier than tarting up an old one) and it will look good.
Keep the tenant in mind
If your strategy is to renovate and hold your property, keep your prospective tenant in mind while you carry out the work. Remember the things that attract people to a rental, for example wardrobes, parking and telephone points for internet access. Think up magnet features: a fence, for example, to provide privacy for the tenant.
If possible, live in the house for a little while before you rent it out. This is the best way to learn what qualities a potential tenant will find lacking.
Consider staging your property
Even a beautifully renovated home can seem stark when it’s empty. ‘Staging’ means you put furniture into the property. Staged houses get better tenants, sell or rent faster because people can see the potential of the space that’s there.
You can find reasonably priced staging furniture from places like garage sales, www.graysonline.com.au, ebay, and the Trading Post. If you choose this option, buy furniture that will look good in the property – there’s no point spending money on this if it doesn’t reflect the style of décor or tenant you have in mind. For example, colonial-style table and chairs may look great in a country home, but they don’t add appeal in a city apartment.