Australian Financial Review Smart Investor magazine, September 2007
By Karin Derkley
It’s a dream many people share: buy a dump, do it up, then sell it on at a profit or rent it out at a premium. But how easy is it really? And how much do you stand to make?
Karin Derkley plans the perfect renovation.
Done quickly and efficiently and with insight into what buyers or renters want, renovating a house or flat can be a very profitable exercise.
Ask serial renovator Wendy Bergsma. She’s bought and renovated six properties in seven years, renting some and selling others at a premium afterwards.
In her best result yet, Bergsma bought an old Queenslander in Brisbane for $243,000, spent $40,000 on renovations and had it valued by the bank six months later at $370,000- a rise of $87,000, more than double the cost of the work.
She’s had good results on the rest of her properties too- three other houses plus two units- doing them up from top to bottom and achieving, on average, a 50 per cent return on the renovation to outlay.
But there are some basic rules to follow to make sure your renovation doesn’t become a sinkhole for your money and that you don’t overcapitalise- spend more on a property than it will return.
Many people make poor judgements on what will add value, so the money spent may never be recouped, says Jacque Parker, another serial renovator who also runs a property-buying business, House Search Australia.
Common problem areas include spas and new bathrooms, swimming pools and structural changes- expensive and time-consuming work that can leave renovators out of pocket. Parker suggests investors conduct a thorough cost-benefit analysis to ensure improvements will mean higher rent or add capital value to the property in the short term.
Whether you’re renovating to rent out or to sell at a profit, research your market first to gain a good idea of what your target tenants or buyers expect from a property in that location, Parker says.
Don’t bother installing a flash kitchen if your tenants will be students. Young professionals wanting to rent near work will want a low-maintenance home. And houses in an area that’s popular with families may benefit from an extra bathroom and an outdoor entertainment area.
Parker says real estate agents are some of the best sources of information on an area’s demographics.
“They’re in the market constantly and usually are on the ball with what buyers prefer and are seeking.”
Fix it up, rent it out
If you’re renovating to rent out, the idea is to create a package that’s clean, sleek and low maintenance, Bergsma says.
“Given the dog boxes that are out there, tenants are only too happy to pay a few more dollars for something that’s clean and co-ordinated that they’re proud to call their home.”
To achieve this, she recommends a full cosmetic renovation that includes a revamp of the bathroom and kitchen, new carpets or polished floorboards, and modern neutral colours throughout.
Parker says she was able to increase the rent on one her properties by $30 a week, simply because she had repainted and carried out minor maintenance.
Storage is another essential, Parker says. She installed built-in robes in another property after a tenants complained about the lack of storage.
“My asking rent was able to rise from $370 to $385 a week as soon as the BIR’s were on the menu.”
Apart from the boost to rental, Bergsma points out, creating a stylish, desirable home also brings landlords higher quality tenants- not to mention improved resale value.
“I’ve worked as a property manager and it always amazed me how few landlords appreciated the impact of spending a few thousand dollars on their property.”
Renovating to sell
Renovating to sell requires more than a cosmetic renovation, especially in a flat market, Bergsma says. “To sell at a profit, you really need to add value in some way so your house or unit stands out as something special.”
Apart from painting and decorating, creating a spacious and well-designed open plan living area that leads out to an outdoor entertaining area may well add more in value than the work costs.
It may also pay to add an extra bathroom or fit the kitchen out with granite and stainless steel. In the bathroom, splash out for a frameless shower screen and a wall-mounted basin or vanity.
“It not only looks classy, it makes the room look bigger,” Bergsma says.
Judicious use of accent colours provides a classy, up-to-date look, but avoid anything too eccentric. Create a setting in which potential buyers can imagine themselves, while leaving them room to add their own decorator touches.
Return on investment
There are any number of beautifully renovated homes out there that won’t make a cent of profit for their owners. So any work you do must be considered in terms of its return on investment.
Parker aims for a minimum of 25 per cent return on investment- spend $10,000 and you should expect to add at least $12,500 to the eventual sale value.
Bergsma says that when she takes on a property for renovation she plans and costs the job down to the very last detail so she’s ready to get to work on settlement day.
“You have to be incredibly well organised as a renovator,” she says.
“Know exactly what has to be done (and) how much you need to spend on it.”
- Renovate the home as a complete package, aiming for a clean co-ordinated and modern look
- Decorate in stylish neutrals, using similar colours and materials throughout the property
- Visit display homes and look at magazines to get a sense of what the current “look” is in home presentation
- Plan the renovation to the smallest detail so you’re ready to start work on settlement day
- Line up tradesmen well before you get the keys to the property, and pin them down to a specific day and time
- Work with tradesmen on the job, help them with preparation and cleaning up afterwards. Don’t let them do any work you can do yourself
- Treat tradesmen well and pay them as soon as they finish a job. They’ll be happy to do the job on time next time you need them
Repairs or improvements you make before you rent a property out- or at any other time it’s vacant- are considered capital expenses that should be added to the cost base for the purposes of calculating your capital gain or loss when you come to sell.
As long as you hold the property for at least 12 months, you’ll be taxed on only half of any capital gain.
While the property is rented out, you can claim the cost of repairs and maintenance as a tax deduction. You can also claim depreciation on any fixtures and fittings. These are things that aren’t part of the building- such as stoves, curtains, blinds and carpets.