The Ultimate Guide To Renovation Course - Module 1: Types of Renovation

Essentially, there's two types of renovations, cosmetic and structural. I believe within these definitions, property renovations fall into one of the following categories which I term the five Rs of renovation. So the first is refresh. This is typically a clean up of a dirty, smelly property. A bit of paint and a good clean is all it needs. This is by far the easiest type of renovation, which, depending on how bad the property is, usually is not going to cost you a lot, but may only increase the value of the property incrementally. The benefit of this type of renovation is that you can confidently expect to get you an increase in rent. Then there's the repair. For this type of renovation you may need to invest in a toolbox. From my experience, you will be repairing and fixing things up. There may be some expenditure mainly on crack filler and in some cases improvements to items that are already there, such as a new bench top on an existing kitchen. This is an excellent renovation strategy for creating equity without a big budget, but also improving the look and creating a new feeling. You may not really get a lot more rent for this type of renovation, but it will usually rent quicker as tenants like to have newness to the rental properties without having to necessarily pay for it. The next is rejuvenate. This is the typical renovation strategy that we've all seen and done. It would normally involve a new kitchen, at least a refresh of the bathroom, a new carpet or floor sanding, new window coverings, and the age or fix all painting. The cost associated with this type of renovation is really based on the outcome you want, but on average it would be 10% of the purchase price. This would keep the renovation standard comparable to the property value and avoid the risk of over capitalizing. The next type of renovation is restructure. This is the structural renovation. This would require a building permit in nearly all cases. In some instances, such as the land being under a certain size or the property having an overlay, such as heritage Council planning approval may also be necessary. It may involve restructuring the back of the property to open up the living area and creating the outside living space, or even creating extra bedrooms upstairs. These all require council approvals. As soon as I think of this, I think of delays. As part of your research, you want to know how the council in the area you're looking at assesses these types of renovations. The real question then becomes what return can you expect from the investment? And we'll talk much more about that later. In some cases, it may even be worthwhile hiring a valuer to do a before estimate and then an after estimate so you can make a more informed decision. We'll deal with that later and the use of other professionals in your renovation strategy. Then we have the revamp. This strategy is really about looking at the properties you already hold in your portfolio. Maybe you've had them for some time, a few years and you've had some capital growth and you've done a little renovation and and everything is coasting along. You have the means and the money to invest in another property, but I encourage you to reassess your current portfolio as you might be leaving some money on the table. If you've done all the research when you bought the property initially, then you're going to have a property where people want to live in a good growth area and you probably added value as well. At this point you can look at the comparison and advantages of using your equity growth. In buying another property or refashioning the one you already have, you will make a savings on stamp duty and purchase costs of which could take your current property to the next level. You could create a new bedroom, complete the stairs and the attic for $35,000. This May you've done well. Enhance the value of your property up to over $100,000 more. Or you could spend the same amount of money on a $250,000 property covering the 10% deposit and stamp duty. Finally we come to detonate. This is a complete demolition job and rebuild. This might sound drastic, but in my opinion many a personal home renovation will be very well placed to have this strategy applied to it. As an investor, you might find a great location with a property that needs to be detonated. Consider doing this and putting on a new kid home, a relocatable home or something like that. The strategy is drastic and will require lengthy council approvals and a high capital cost. Build the property. But there is an opportunity, especially if you are buying the property at land value. And of course the rental yield will be much better and the tax deductions on a new property. So it's something to consider. Now look at restructure with a twist and I really like this one. A clever twist to this strategy is the restructure without requiring the time consuming council process. This is my favourite renovation technique. Now it involves looking at a property, be it an apartment or a house and creating new rooms within the existing floor plan. In some councils you may need to notify them if you are changing things internally, so you should ask. This means you can change a two bedroom property into a three bedroom property with a New wall. This does involve a bit more work on thinking creatively as we will see a bit later. But what it means is that you can bump up your property value into the next price range. That is, the median price for a two bedroom in your area might be $450,000 and the median price for a three bedroom $600,000. Now you need to make sure that the area you are renovating in has a large enough differential between the two bedroom and the three bedroom properties when it comes to price as you have to pull off the renovation. So it looks like it should be there. If you construct a $5,000 wall in the middle of a lounge room in a unit, then don't expect the valuer to add $100,000 in value. This strategy combined with a rejuvenation strategy I believe will be the big winner for renovators creating equity and a substantially higher rent. Most renovators lie somewhere between the cosmetic and the structural renovation. This is usually a function of how much money they have to contribute and how much risk they are willing to take on. In my experience, the repair is where most property investors start as they build up their portfolio and build funds to contribute to the next strategy. The rejuvenate few investors have stumbled upon the amazing opportunity of the restructure with a twist. And very rarely does the experienced property investor consider the revamp. But they should, especially as they reach their borrowing limits. Finally, the detonation strategy could actually be the strategy which you only target to find property properties at below land value in good areas and where building a new property makes sense. It all comes down to what suits you, your budget and where you want to end up. So we're back to your goals again. The reality is that renovations are going to cost you money and time, so you need to know how to assess properties with your strategy in mind, the costs and the outcome. So let's look at this. Units versus Houses. Now this is a quick aside because a lot of people ask me should I buy a unit or a house? Renovation of units generally as a strategy would dictate, looking to buy an older unit, or if you're not looking to renovate, then your strategy would be focused on buying a brand new or newly renovated unit. Once you've determined your initial strategy, which we'll look at in the next module, here are some additional buying criteria that you might consider. You might buy a unit in a block with no more than three levels that has reasonable strata management fees and maintenance costs, that is money not going to upkeep of the gym and the lift. It's not on the ground floor for security reasons. If it is on the ground floor, it must have exclusive access to an outside living space. Strata managers with a proven history of allowing renovations, a high proportion of owner occupiers, a car park and a lockup storage. That's a specific buying criteria that you would develop from your property strategy. There is another caveat for certain renovations, usually those that involve structural renovations. Approval would normally be required by the local council. The local council's guidelines should be examined on the council's website. As we noted earlier. Now, as a rough guide, you'd not engage in a renovation that might involve structural design or modification as that would probably make the whole project non viable from a return on investment perspective. The one exception to this might be where a wall is to be removed to create more internal space. Again, the economics and the council's requirements would need to be checked off. Each property you come across can be cross checked against your strategy specifics. This will allow you to determine whether the property is congruent with your chosen strategy and financial goals. Now let's look at flipping. Flipping is fundamentally based on buying in an area with a high level of home ownership where you're targeting homeowners for your resale market. This is in contrast to buying, renovating and renting as a strategy. In this case, you're buying in an area where there's a large proportion of renters. Hence your target markets are so very different. Thus where you buy will be different as well. That's why knowing your goals and specific strategy is fundamental to where you buy and why you can't buy before you decide on what you are going to do with this property. Flipping is the term given to buying and selling within a short period of time, usually based on a renovation. Essentially this involves buying well, renovating and selling, preferably in the same market. There are great benefits of doing this, including essentially your bank balance goes up quickly if you do it right and it's getting it right where the risk lies. Now I just want to cover off why Most Flips flop From what I've seen, many flips do flop, mainly because the person doesn't understand the numbers. Here's an example of the cost you'd expect from a cosmetic renovation. So let's say you're buying in an area with a median price of $550,000. Now let's work through what you need to buy the property at to make some money. The end value post renovation has to be $550,000. Now, acquisition costs, let's allow $15,000 stamp duty legals holding costs for six months of renovating, $16,500. Now that's assuming you've used equity to buy the property and and the interest rate is around 7.5% per annum. The renovation costs. Let's allow $40,000 and let's have a profit margin of $40,000 as well. So you're making a dollar for every dollar that you spend. Thus, to make a profit before tax of $40,000, you have to buy the property at approximately $440,000. If you were flipping, you'd also have to take out selling costs of 2.5 to 3% of the end value. And then you need to pay the tax on your profits as well. You are buying a property below $440,000 to renovate it with a budget of just $40,000 up to a value of $550,000. Now it sounds hard, doesn't it? Take into account that with a spend of $40,000 on the renovation, you will not be doing a high value adding structural renovation. This would be more like a cosmetic rejuvenation type renovation. In most cases you'll find that the property that you secure for less than this will actually be advertised higher and you'll be negotiating the price down. However, it is possible to do these types of deals do exist. You just need to know your numbers and be able to identify the opportunity. So doing a flip that is making a big profit means you have to be even more vigilant on the property you buy. The renovation costs, the time to get the approvals and the holding costs and then the risk that the market has moved down whilst you go through the process of renovating. Now, many first time investors look at this strategy flipping as an easy way to make money quickly so they can get to a buy and hold strategy later. In the Renovation for Prosperity seminars I've held throughout Australia, there are always a few people in each class who plan on giving up their day job and renovating. Now, it sounds easy and is often promised by renovation courses. Quitting your job, understandably for most Australians, is a very enticing idea. But what these courses often fail to mention is if you don't have a job, the banks just won't lend you the money financing a flip. Now remember, lenders are in the business of making money. The reality is you are building up a credit profile of a person that lenders may consider to be risky. That is based on having a number of credit applications, a year, you may want to do two or three flips a year. For instance, lenders want long term clients who stay with the bank and have more than two products with them, that is A loan, a credit card and a savings account. After a flip or two, you may find the lenders not willing to lend to you and the money dries up. I'm not saying it's impossible to pursue a full time career in property investing. On the contrary, it's certainly is. It just requires a transition time to gain equity and some very good planning for the more experienced property investor with a large line of credit against an existing property. That is they've tapped into the equity in the properties they already own. They could purchase and renovate the property from this pool of money without ever actually getting a loan against the property they're buying. This finance strategy would not affect their credit file. However, that's more advanced and we're going to go into that into a lot more detail later. So don't give up your day job yet. You need it to get going and to be able to afford to keep going. So now let's look at the module outcomes. You should now know what your goal is and what the time frame to achieve your goal is. You're also familiar with the different types of renovations and which suits you and your budget. You know, when you buy, you should use the Trident strategy. Buying below the market value in a growth area and renovating. So you're adding equity in three ways and if you get one wrong, you're still going to make money. As a rule, keep cosmetic renovations under 10% of the value of the property and make sure that structural renovations unlock equity and add value to your investment. The point is to not only get your money back, but to make more money on your investment. In the next module, we're going to review the importance of finding a property in the right location. I can't wait to share that with you.