The simple mistakes that can take a wrecking ball to your reno-vestment riches
Article by MozoBuy an old house, give it a makeover and get rich from the sale. All the hit ‘renovation’ TV series make it look like a breeze but a few poor decisions and your ‘reno-vestment to riches’ plans could end up in the skip bin.
Shannon and Simon walked away from The Block with hundreds of thousands of dollars in profits and not one single grey hair but three other couples were left with barely enough to justify the three months of toil. Why was there such a difference in the results?
Never believe what you see on reality TV folks. Renovation and real estate experts say too many naïve couples walk into the ‘reno-vestment’ game with starry eyes about making their fortunes and walk away disappointed, even poorer, for the experience.
The money experts at Mozo have identified the “Top 5 Reno-vestment Wreckers” to avoid so you can come through your next real estate makeover with healthy profits, no emotional scars and, for couples, your relationship in good shape.
Wrong house, wrong street, wrong suburb
Take your time, do your research and stick to what you know to ensure you find the right property in the most profitable location. Emotions and personal preferences must be completely put aside. Fluttering from one suburb to the next trying to find the ultimate ‘renovator’s delight’ is a strategy fraught with danger.
Intimate knowledge is the property investor’s greatest weapon. The more you know about a suburb’s population and property market, the greater your likelihood of choosing a property and a location that will reap maximum rewards.
‘That’ll do’ approach to profits and costs
No point ordering those beautiful new kitchen cabinets until you’ve measured up to make sure they’ll fit. Plans only need to be a few millimeters out for chaos to ensue and exactly the same rule applies to the financial management of any renovation project.
Profitability is the name of the game. Don’t think about getting into the buy-renovate-sell game unless you’re prepared to give a project’s financial feasibility even more attention to detail than choosing the funkiest colour pallet and finishes.
The financial analysis must include all costs: purchase costs, holding costs, renovation budget; and you’ll need to have a cold, hard look at the property’s resale potential. Use checklists to ensure you don’t overlook any items of expenditure.
Over-estimate your costs and under-estimate your profits to come up with worst case scenarios. Every new light switch, every new internal door costs money. Even a slight interest rate increase can play havoc with your budget. Council rates, water and electricity bills will need to be covered while you’re renovating so the longer the project takes, the less profitable it may be.
Project your sale price accurately, based on sales of similarly-renovated properties in nearby neighbourhoods. Don’t overlook capital gains tax – if the amount you receive from the sale of the property exceeds its cost base you may have a capital gains bill, calculated at your marginal tax rate. The cost base includes the amount you paid for it plus costs you’ve incurred for buying and holding it, like legal fees. Accurate calculation of the cost base can make a big difference to the amount you pay in capital gains tax.
Failure to plan
No plan, or not enough planning is, ultimately, a plan to fail. It pays to use a draftsman or architect, irrespective of whether you are outsourcing to builders and qualified tradies or being completely DIY.
You may only need a written specification for a simple renovation. It’s safer to pay for detailed drawn plans for larger, more complex projects. Photos and magazine clippings can also be helpful when communicating with tradespeople.
Use appropriately licensed builders and tradespeople and ensure you always have written agreements/contracts detailing expectations, timeframe, work to be completed and costs.
Failure to manage
Time and money can make or break the profitability of any renovation project. If both are managed well, your chances of success will go up exponentially. Waste either and you might as well pour your profits down the plughole.
If you’re in it to make money, then treat it like a business where you are the manager. Each cost overrun or time delay comes off your bottom line so take charge and prevent them from happening in the first place.
You will need to know how to develop project schedules, how to delegate and communicate effectively. Other management skills such as monitoring performance and progress will also be essential. Individuals who have no project management experience may not be suited to renovating for profit.
The market can change during a 12-month or even a six-month renovation. Many property developers and investors suffered enormous losses as a result of the GFC. The best way to avoid this ‘reno wrecker’ is never to depend on a quick sale.
When you are developing your worst case scenario calculations, consider what would happen to your bottom line if the property was passed in at auction or took twice as long to sell as anticipated. Could you continue to service the loan and all other costs until you found a buyer willing to pay the right price?