Learn the five most common renovation mistakes: picking the wrong suburb, overpaying, buying emotionally, skipping your budget, and renovating beyond what the neighborhood will bear. If your projected resale hits 80% above the street range, you're in trouble.
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May 10, 2024
If your resale figure exceeds 80% of the range of the street, you are in high-risk territory.
Chapters
With renovating, it's a case of the more you do it, the better you become. But that doesn't mean that your first attempt has to be an expensive failure. In this short module, we'll look at some of the common mistakes that arise often for both new and old players. I also provide some tips and tricks to avoid these happening to you. So protect yourself and your investment by learning from the mistakes of a seasoned pro. There's no need to go it alone. Location, location, location. As we've learned throughout this course, it doesn't matter how good your renovation is. If you buy in the wrong suburb, your renovation is unfortunately doomed to fail. Not all suburbs are created equal, and many suburbs have very little pricing disparity between unrenovated and renovated properties. So even if you can achieve fantastic bang for your buck at minimal cost, there is simply no margin present to add any equity. Remember my Trident strategy. One of the keys is where you buy, so it comes down to research, research, research. Finding the right suburb for your budget can take of research, but it is the foundation of which all the other steps depend. If you can't dedicate the time to do this, then I highly recommend using a professional such as a buyer's advocate or a buyer's agent. They can often also assist you with the second part of my Trident strategy, buying below the market. You simply need to factor in their commission in your costs, which they often make back for you during the purchase. The Right House Most people can remain objective during the suburb selection process by simply following the steps outlined of uncovering predicted growth, pricing disparity and buyer renter demand. But when it comes down to choosing the property itself, this is where emotions can start to creep in. Remember, to be a successful renovator, you need to leave emotion out of the equation. The right property at the right price is the key to success. Now. Buying without Emotion Always remind yourself that this is a property investment transaction and emotion should never enter into the purchase decision. It's purely about the numbers and whether or not the property has the capacity to have value added through a renovation. Now, unrenovated doesn't equal value. As discussed in module 4 the right property it's critical to find a property that has the capacity to add value. People often make the assumption that because a property is unrenovated, there must be opportunity to add value. This is not always the case. If pricing disparity is not present within the suburb and then even the street, even a minor renovation could result in over capitalization. You can be safe in the Knowledge that there is capacity to add value only by knowing the value of the other properties in the street. When arriving at your resale or revalue amount, it's important to remain objective. Be sure that you're comparing sales that are like for like and sales that are in close proximity to your target property. While it would be wonderful to create a resale price that sets a street record with your beautiful renovation, this should obviously never be how you arrive at your end estimated value. Be conservative. As John Edwards from Residex says, if your resale figure is exceeding 80% of the range of the street, then you're in high risk territory. Along with your profit margin, there are two critical numbers that inform the purchase price. The first the end value. How much will the renovated property realistically be worth? And the budget. What will be the total cost of the renovation project, including all fees, not to mention the time frame to finish the renovation itself? These are the important numbers that inform your purchase decision. Assuming that you bought your property below market and in a suburb with pricing disparity present the two most important reasons that a renovation will fail to create equity. Overcapitalisation and not renovating to the needs of the local demographic. Let's have a talk about overcapitalization. Sometimes you can see obvious ways to make a property much better. You you may see opportunity to create a better layout by just moving a few structural walls. Now this may bring this house up to its full potential in terms of layout. But if the additional cost of creating this then pushes you over the resale level of the street, then you have over capitalised the property. Moving a structural wall, for instance, may seem like just one wall, but it has many knock on effects. An engineer's report, building drawings, electrician, carpenter, plasterer, painter and possibly even floor repair. It adds up fast. There are many temptations to do this. If we just turn this bedroom into a bathroom, it will be so much better. Or if we just build a small structure on the outside of the bedroom, we can turn it into a master bedroom with an ensuite. All of these things will no doubt make it a better property and could be excellent ideas if they're within your predetermined budget. But nine times out of 10, throwing additional money at a renovation will not change its end value. Rather it will come directly off your profit. Its end value will always be governed by the other houses in the street. This is why we start with the end value first and then work our way backwards to to establish the cost of the renovation, which then determines the buy price. The initial renovation costing and scope of work, therefore, should not change.
