To renovate or buy new is a question many Australians face. Let’s consider the differences between renovating and buying a new investment property.
Buying to renovate
You’ve seen the shows and heard the talk at the barbecue on the weekend, renovating can you make you money. Contestants on The Block are flipping their newly renovated properties for thousands of dollars’ profit, and your best friend’s cousin’s next door neighbour’s son just bought a house, renovated and sold it for a huge profit. However, for every phenomenal story of profit, there are horror stories of running out of money, problems with tradespeople, cost overruns, time delays, council issues and so on.
Planning is imperative to make money from renovating, and your first step should be developing your property purchase strategy. When working out how much you can afford, you’ll need to consider funding the deposit and renovations, as well as cash flow to make the mortgage repayments while you’re working on the property. You’ll need to determine just how much renovating you want to do.
Will you only carry out cosmetic enhancements, for example, kitchen, bathroom, paint and flooring? Or will you include structural elements, such as re-positioning the bathroom, or knocking out and rebuilding walls? The more work you do, the more cash you’ll need, the longer it will take and the greater the risk.
You should also consider who you’re competing with when you’re putting in an offer or bidding at an auction. Seasoned renovators or those in the building game will have the contacts and suppliers to deliver the same product for less and often faster. Accordingly, they can afford to pay more to acquire the property, and if you have to outbid them, you’re starting to eat into any prospective margin and increase your risk.
Renovators need to understand the cost of their time. One the most popular ways to renovate cost effectively is to do it yourself. However, if a professional can get it done faster, the extra rent may compensate. You also have to consider the monetary cost of your time. If you’re going to take time off work to renovate, how much money will you lose in lost pay or leave?
While buying right is important when it came to renovating, doing research and buying right when you’re not planning to add value is vital. When you’re looking to simply buy and hold, you want to buy something that ticks all the boxes. You want it to be close to major infrastructure, and you want to be sure that the local population can sustain continued growth and have different industries providing local employment.
Off-the-plan property investing introduces another layer of complexity. You may hear of the lucky off-the-plan investor who saw the value of their property go through the roof while they were waiting for it to be completed.
On the other hand, unsuspecting investors have been finding that they are given properties they didn’t sign up for, but legally have to settle on due to the terms of the contract. There was been recent media attention on sunset clauses where investors have ‘lost’ their properties and had them resold by the developer at higher prices.
You also to consider the fear of buying something that isn’t complete and, therefore, not know exactly what you’re getting. But many of these issues can be avoided with thorough research, expert legal advice, and by surrounding yourself with a professional team of builders, engineers, tax accountants, bankers and buyer’s agents. You will benefit from getting in early and selecting the best block of land, unit or townhouse, and not having to compete with the general market.
David Hancock, director, Binnari Property