Investing In Your InvestmentA good renovation can instantly increase the value to your property if it is based on careful planning, impartial choices and keeping within a budget.
In the early stages of selecting a property, researching the market is imperative, as renovating a run-down property will not always return a profit. You need to determine whether or not you can achieve a reasonable profit once all of the work is done. One of the best ways is to research the ‘sold’ prices – not just the listing prices – of similar renovated properties in the area.
Major structural damage is costly to fix, so a building and pest inspection is a must during the buying process, as it can help identify structural issues, water damage or major repairs. Home renovating website www.homeimprovementpages.com.au suggest that building inspections can actually save you money, as the results reveal hidden repairs and faults associated with the property, providing you with a useful bargaining tool during price negotiations.
Once you have secured a property, the very first thing you should do is connect the power. As simple as it sounds, many people forget to do this right away; according to Aurora Energy, some energy service providers require up to five working days to connect or disconnect a utility – so if you don’t connect the power straight away, you could push your entire project timetable back.
Assess the damage
Renovating can be overwhelming, so the best way to begin is to assess the damage upfront, and prioritise.
Create an itemised list of every renovation you intend to complete. Start by identifying those things that must be done before other jobs can proceed, such as replacing the old toilet before you re-tile the bathroom. Next, consider the largest, most complex tasks – installing a new kitchen, for example – and from there list all intended repairs and restorations, from electrical work to painting.
Remember to also include smaller renovations – things that can be done at the very end, such as replacing aged cupboard handles with new metal grips, or installing new curtains – as they give a polished look to the overall renovations.
Once you have entered all of your tasks, prioritise the list and give each one a deadline, as delaying one repair might impact on other renovations. Be as specific as possible; ‘purchasing curtains’, for example, should be a separate entry from ‘installing curtains’, as you might order window coverings from a supplier with a four-week lead time. If you wait until the end to order, you could wait weeks for delivery, or pay a premium to get them completed quickly.
‘Buy and sell’ investors : What to avoid
If aiming for a quick turn-around on your property, you need to be organised and proactive – every day that the property remains unsold or untenanted costs you money, so you can’t afford to leave things to the last minute. Before you start ripping things out make sure you have any planning approvals or permits in place. With tradespeople time is money, so get yourself organised.
Once the contract on the property goes unconditional, ask to go through it with a tape measure to size up cupboards, flooring, and any other areas you intend on renovating. Use these measurements to arrange quotes and book in contractors, so you can begin work on the property as soon as the day after settlement. Contractors can book out months in advance, so lock relevant contractors in as soon as possible.
Be aware of the latest trends in renovating, and how they might fit (or not fit) into the property. Terracotta tiles, for example, were the must-have flooring of the mid-nineties, but now looks dated. When it comes time to sell, timeless work, such as elegant, functional spaces, neutral colours and broad styles, always hold up best. So before committing to the latest styles, consider the consequences. The dark-grey tiles earmarked for the kitchen could make a poky space look even smaller, or fuchsia feature walls might turn off conservative buyers.
Also be careful about over-spending on expensive renovations that add little to the property’s overall value, such as extravagant light fittings or deluxe curtains. “The important things to renovate, and where you can improve the capital value of a property most, are kitchens, bathrooms, landscaping and gardens, plus a coat of paint,” explains Patrick Bright. “These areas are where you can get the best return on your investment.”
If you’re unsure, do a cost-benefit analysis – will the $12,000 spent on air-conditioning the entire house increase the overall value of the property by at least that amount?
‘Buy and hold’ : what to do first
Renovating a run-down or tired property provides an excellent opportunity to maximise rental yield for minimal spend.
Before you begin, get a rental appraisal on the property as-is. You can make comparisons online via websites such as www.realestate.com.au and also with the property management agency. You will not only confirm whether the property is under or over-rented, but the agent can also make suggestions to assist in gaining a greater rental return. For example, the agent might know that the tenant had previously requested an air-conditioning window unit for the master bedroom. By installing the air-conditioning unit at a cost of roughly $800, this could add $5-$10 per week to the rent in your pocket; and while the investment pays for itself within a couple of years, you have also added long-term value to the property.
Any renovations should be conducted with the tenant in mind. Consider refurbishments that will improve functionality and increase space and storage, whilst at the same time taking into account the impact on current tenants. Also, if replacing carpet, make this the very last thing you do, as it serves as a drop sheet in the meantime.
Many investment property owners miss out on potential tax credits by failing to take full advantage of a property’s tax depreciation potential, so once you have completed renovations, get a Tax Depreciation Schedule. You can claim depreciation on all Items of Plant contained within the property; these items – determined and reviewed by the ATO every six months – include cupboards, ceiling fans, floor coverings, hot water systems and light fittings.
A qualified Quantity Surveyor can prepare an ATO-approved Tax Depreciation Schedule. Engaging a Surveyor will set you back roughly $500, but you should recover this cost in the first year of deductions. Some firms will even guarantee that if they cannot claim a higher amount of depreciation in the first year than their fee, there will be no charge.
‘Buy and hold’ : what to avoid
When renovating a rental property, aim for inexpensive, sturdy fixtures and fittings that will weather potentially clumsy and messy tenants. For instance, opt for hard-wearing vertical blinds or curtains over delicate, flimsy venetians.
The overall style of your property will determine the type of tenant – higher quality properties attract higher quality tenants – however certain things, such as carpet, will wear easily, so speak to a professional about the most appropriate, durable style. Sisal or “cord” carpets are popular within rental properties; made of textured loops in rows or random patterns, sisal is a cheap, heavy-duty fabric that looks classic, and the patterns and textures help disguise stains and spots.
If you have difficulty finding a tenant, research the rental price of similar properties in the area to make sure you’re not setting the rent too high. According to Australian Residential Property Planners (ARPP) ‘vacancy’ has two main causes: the amount of rent being asked, and the location of the property. ARPP recommend that if you can’t find a tenant, lower the asking price until a suitable tenant is found – less rent each week is better than no rent at all. Also consider the vacancy rate of the area, as tenants are in a stronger position to negotiate on rents if vacancy rates are high.