The Ultimate Guide To Renovation Course - Module 1: Strategy Selection

There are so many different types of strategies that can lead you to be successful in achieving your property investing goals. Each strategy has pros and cons, but choosing the one that's right for you is what's important. Determining your property investing strategy is about incorporating what you want to achieve by what date. That is the goals that you've just defined in this module. Now, knowing what you can afford and then fitting them into a proven strategy to make it work. That's how you become successful at property investing. The right strategy will allow you to focus your energies on finding a property that will support your goals and fit in with your time frame. Just deciding on an asset type, for example Units versus Houses, is not a strategy. However, if you're deciding to build your portfolio by purchasing corner blocks and subdividing, then that's an example of a property investing strategy. As you go through this module, I want you to focus on what your goal is and the time frame you've set to achieve those goals. And finally, your risk tolerance. There's no point in choosing a high risk renovation strategy just because it could generate you the greatest return if you if you know deep down you can't commit to that strategy, and worse, you undermine it because it never feels quite right. There are many property investing strategies, but this is a course about renovation. So I'm going to look at the two key renovation strategies you can renovate and rent. Now, this is the most common renovation strategy. It's really just a version of what most homeowners do, buy, buy and hold. In this variant though, it's about buying a property and then adding value through renovation and keeping it to rent it out. There are low cost renovations such as general clean up and replacing a few broken items. And then there are high end renovations that involve council approval and major structural change. It's common for cosmetic renovators to start with approximately 10% of the value of the property for a renovation. As a kind of rule of thumb, this is a very loose cost guide, but we'll cover this in a lot more detail in the following modules. In essence, this strategy is my trident strategy. It's my three pronged strategy of making money. I buy below the market value, I add value by renovating, and then I select a property in a high capital growth area that will grow my equity in that property. Equity is therefore added in two ways. Some comes from buying at a discount and some from the new post renovation value. However, remember it did cost you something originally, so it's not free money of the kind you make when you buy at a discount, you should also get additional rental yield based on the renovation, which will help you to pay your day to day costs. But what we want to do is focus on the question, will it get you to your goals within the time frame that you want? The real benefit of the Trident strategy is that if you apply these three risk minimizing strategies, then even if you get one strategy completely wrong, you've got two strategies to fall back on. After all, it's better to have a plan A, B and C in my opinion. So let's look at another strategy and that's flipping. This strategy generally involves buying and selling quickly. There are a few ways of making money from this, but you need to be very confident of your numbers because the cost to get in, that is stamp duty and legal fees, and the cost to get out, real estate agents, selling cost and capital gains tax can diminish any value really quickly. So how do you make money from flipping? Most often this will be from either buying well below the actual market value or or through renovating and adding value or changing the use of the property. In both cases you have a property worth more than the cost of the actual purchase and any additional costs, including renovation costs. How do you buy well below the market, I hear you ask. Well, that's module four, the right property. We'll go into more detail then. In general though, it may be due to an uninterested or indifferent selling seller or a motivated seller due to for example a relationship breakdown, an unrealised opportunity such as council planning changes or a perception about the property such as this is a bad area or this property is not well presented, it's dirty. Mostly, however, the opportunity is in seeing something that others don't. Some might just see a one bedroom unit, whilst you might see the opportunity for a two bedroom unit by adding a wall that could cost five, five thousand dollars to put up. Looking for the twist is a great way to add value to your portfolio. The reality is that a flipping strategy is often based on a structural renovation as it allows you to get the biggest profit, but it will cost a lot more. Renovate to rent and flipping are just some of the many renovation property investing strategies out there and it's up to you to pick the one that fits your objectives from these and from all the others that are available. So let's look at how the strategy you select links back to your goals. If your objective is to generate a passive income of $50,000 in five years, remember that equates to a million dollars in assets that are completely paid off generating 5% income, then you may want to consider a faster turnaround strategy such as developing or structural renovations. However, be prepared. With higher reward strategies comes higher risks. The way you select a property to fit your property investing strategy is just one of the most important keys to success. I can't stress this enough. Select the wrong property and you'll be sunk before you even set sail. So let's get specific about the type of renovation you might undertake. Remember, this needs to fit into your property investing strategy, the timeframe to achieve your goals, your risk profile and let's be honest how much money you have to not only buy the property but to renovate it. Now let's look at cosmetic renovations. A cosmetic renovation, as the name suggests, involves cosmetic alterations that do not affect the building structure. This typically involves repainting, floor sanding or even new carpets. Remodeling the kitchen and bathroom landscaping. That's for houses or semi detached houses. A cosmetic renovation can also include improving their layout and moving non load bearing walls. The cosmetic presentation of a property is often overlooked. As investors, we tend to look strictly at what is wrong with the property and what needs fixing in order for the property to be profitable. But buyers and renters alike are interested in properties that look good. Ignoring the cosmetic aspects of a property in favor of the structural aspects is a common yet big mistake. Cosmetic renovations add value to a property quickly. When new buyers look at a property that you have on the market, they are assessing how much of their own money they will have to put into the property to bring it up to date and make it liveable. Cosmetic renovations vary in cost, but not as much as a structural renovation. Adding value by making simple cosmetic renovations can mean the difference between selling or even getting the property rented quickly or having your property sitting on the market for much longer than optimal. Remember, in this program we are dealing with achieving optimal results. Now let's look at impact. Cosmetic renovations don't have to cost a fortune to add value to a property. As a matter of fact, as an investor, you don't want to spend a lot of money on your cosmetic renovations. You just want them to wow the buyer or the renter. So from your point of view, the less you spend, the better. Properties that look good sell and rent for more money than properties that may be structurally sound but don't look so great. Buyers and renters associate value with their perception of value. So how do you balance the cost of cosmetic renovations with ensuring that the renovations have the most impact possible? First, focus on low cost renovations such as repainting, landscaping and just removing the clutter. When you consider the cost of a cosmetic renovation, remember to factor in the length of time a renovation will take to complete. While you're renovating, you're not only paying for the renovation, you'll be paying for your holding costs, that is Your loan, interest and taxes on the property. As a general rule, keep your cosmetic renovation costs under 10% of the value of the property. However, in some situations, you might go down as low as 5% or up to 15%. The thing is, renovation has to be suited for the area and the property and the target market. So let's look at structural renovations. A structural renovation is a renovation that adds to or alters the structure of a building. Such as adding a room, removing load bearing walls, adding a floor. This type of renovation requires a building permit in nearly all cases. Now, whether you plan to live in the property yourself, rent it out, or resell it, the property should be safe and structurally sound. If you're going to resell the property, you won't be able to resell it for more than you paid for it unless you've added some really great value. Now, if you intend to rent the property, think about what you would like to see in the rental property yourself. Or more important, what features are comparable for other properties in the area. Would you spend your hard earned cash on a property that just isn't up to par? Take a look at the properties around yours. The idea is to bring your property up to or just past the level of value of the properties that surround it. But be careful. If you think that sinking $50,000 into renovating a new property that is surrounded by old style bungalows, no amount of money is going to make that property desirable or more to the point, valuable. It's just not in the right area. So make sure that what you intend to do to a property will make it marketable within the area it's located. Like all our work here, do your research first. So let's look at the sums. Renovations, either cosmetic or structural, should unlock equity in a property. They should add value. If they don't, don't waste your time on the renovation. There are two critical issues to the end value. How much will the renovated property realistically be worth? And your budget. How much will the renovation cost to to get to that end value? This then dictates what you need to purchase the property for in order to make a viable project. We'll address this later in more detail in future modules.