G’day. My name’s Ben Everingham, and in today’s video I’m going to talk about the three reasons why you should renovate your investment property.
G’day. My name’s Ben Everingham, and I’m the director here at Pumped On Property. In the last couple of years we’ve helped our clients buy a huge amount of investment property in Australia. In today’s video I’m going to talk about the three reasons I personally believe that an investor should actually consider or actually renovate an investment property.
I think a lot of the reasons why people have beautifully renovated properties in their portfolio is obviously they want to attract higher quality tenants and better rental returns. Obviously it can also help add value to a property. But I think the real reason a lot of investors have these beautifully renovated properties, what I think is far too soon to even consider doing that type of renovation, is just ego or because they want a property in their portfolio that they would either like to live in or that matches the way that they personally look at world. There’s so many examples of people who I believe have completely over-capitalised on an investment property and have gone forward and actually renovated the property far too soon. Today saved is really going to focus on the only three times I think you or any other investor in Australia should seriously consider a renovation.
The first reason to consider renovating an investment property is a no brainer, and that’s obviously if you’re thinking about selling an investment property. It’s rare for an un-renovated product in a market and a renovated product to sell for the same level. That’s because there’s emotional buyers in the marketplace that really appreciate new paint, new carpet, modern fans, modern appliances, modern window fixtures, nicely renovated kitchens and bathrooms, rendered exteriors and freshly painted roofs, freshly painted driveways, nicely landscaped outside areas and things like that.
To renovate a property to resell a property is a fantastic idea. I think Sydney’s the only marketplace that I know of in the last five years where renovated and un-renovated stock was actually selling for the same price. That was just in that 2016 period when it was absolutely out of control down there. I think in most other marketplaces, spending a dollar on renovation and getting it prepared to sell will generally make you anywhere between $1.20 and $2.50 back depending on the suburb and the value and quality of the renovation that you do. It makes a huge amount of sense to seriously consider renovating your property.
The way that I would go about renovating your property for resale is when you’re talking to the local real estate agents who you’re profiling out or checking out to potentially consider selling the property for you, ask them what they would do if they were in your situation and let them know that you’re thinking of doing a nice little renovation to clean up the property. Ask them what’s working in the market. Ask them to show you examples of similar properties that have sold un-renovated and similar properties that have sold completely renovated so that you can understand how much money you should put into the renovation and obviously what you’re going to get out of that.
As always, it’s really about thinking about return on investment and making sure that the dollar you put in is giving you a guaranteed return that can be backed up not by word or mouth or what the agent is telling you that you want to hear, but really based on sales history data, which can be found in a number of sources for free online. A great source of that sales history data is now the sold source in domain or in realestate.com, where you can really have a good look at things that are selling in a very specific part of your suburb that are comparable. Preparing your property in the best possible light for resale is really important, and that’s the first reason I think anyone should consider renovating.
The second reason, and I think this is a very important reason, is to actually refinance a property or to get a property in a position where you’ve added some value so that you can justify to the bank that there’s actually a manufactured gain there, or there has been an increase in the value of the property as a result of the work that you’ve actually done. Far, far, far too many investors, I think, renovate their properties too early. They’ll renovate them immediately after they purchase them, which is a really bad idea. Because, obviously, the tax deductions and the tax deductibility of doing it straight after you purchase something aren’t as strong as waiting a period of time and doing them. If that’s something that you’re unaware of, you should definitely check out some more videos or go and have a conversation with your accountant about what times obviously give you the best potential to maximise the tax deductibility of your renovation.
But I think a lot of people go out there, they renovate as soon as they buy something, or they renovate a property very quickly within the first couple of years or five years of holding it because they want a nicer property in their portfolio or they want to reduce their maintenance or they want to attract a higher quality tenant. But most of the time when people go and do that, by the time they get to revaluing the property to release equity to buy again, depreciation has taken shape. Any quality valuer is going to understand that that depreciation has taken place and that obviously the value of the property isn’t as high as it would have been if you had got them in immediately after the renovation.
This is a huge one. I think personally I would never, ever renovate a property unless I was, one, selling it, or two, looking to revalue or refinance that property. What I would do is I’d ask my tenant to leave, I’d prepare the renovation, I’d complete the renovation. Then I’d ask a valuer or the bank to come duck in or my mortgage broker to order a valuation. What I would do for them to make it very easy is show them what you bought it for, show them what the suburb has done since you bought it in terms of average annual growth.
I would then provide them with a list of all of the items that you renovated with a rough budget. I’d provide them with before and after photos. Then I’d look in the sales history, the sold history of realestate.com, and find comparable properties that have recently resold for a high amount that are in a similar condition and similar floor size, similar land size, and that have been renovated to a similar quality. You provide all of that information in a bit of a booklet or a PDF to the valuer, or your bank, or your mortgage broker to help them logically understand the value that has been added to that property.
Legally, they need to take that information into account. So many investors just send the valuer out there and take what they come back to them with with a grain of salt. But you could really go a long way by educating them, particularly if you’ve spent a bit of money on a renovation and can really justify an upside.
Obviously, again, it’s all a financial decision. You’re never going to get the return from the rent, so when you’re putting a dollar in $20,000 into a renovation, you really want to be able to get at least $2, $2.50, $3 back out. That means being smart, being specific, and understanding what the market and the valuers in your area are all about and looking for.
The third and final reason I would ever consider renovating a property, and this is a very, very basic condensed version of a renovation … I’m literally talking about light fittings, fans, maybe window finishings, floor coverings like carpets or polishing floorboards, painting the internal exterior walls maybe, potentially doing a little bit of cleanup around the garden, potentially looking at painting the tiles in the bathroom or replacing a cheap vanity in the bathroom, these are all these really basic little tips that Cherie Barber always talks about. Maybe repainting the kitchen or replacing the bench top in the kitchen. It’s all that really cheap stuff that most people can find a trade to do for them affordably and manage themselves. It’s really just the makeup on the property.
The only reason I’d ever consider doing this type of renovation is if I bought a property for, let’s say, $400,000, and it was in pretty average condition when I picked it up, and I knew that if I rented it out in its current condition I’d get $300 a week. Maybe I’d go and spend $10,000 on the renovation, and after I complete that, the $400,000 purchase, it’s still worth 400 grand because it doesn’t add a huge amount of value to a property, but the rent has now increased by $100 per week to $400 a week, giving me an extra $5,000 per year in cashflow, meaning yes, it cost me 10 grand, but I get that money back in the first two years. That is a suitable period of time to get that money back into … continue to get a benefit from that renovation for at least another three or four years after you’ve completed it.
That would be the third and final time. Again, don’t over-capitalise when you’re doing that. It’s literally putting enough value into the property to justify an equity … Sorry, not an equity uplift but a rental uplift or a return on the rental yield. In today’s environment where lending can be a little bit tougher, it can be a really nice way of improving the value and improving your overall situation so that you can go back to the bank and go, “Look, my income’s good. The rental return from the property is good. I’d like to consider buying again.”
To summarise the three reasons to seriously consider renovating, and I would never do a renovation outside of these times, is either when I’m saying, when I’m … Sorry, the second reason is when I’m thinking of adding value to a property or trying to create some equity so that I can release that equity and buy another investment property with that uplift or that value that you’ve created. The third reason obviously being if you’re trying to attract a better quality tenant and increase the rental yield.
I hope this video has added a bit of value. I run a buyer’s agency and I’d love the opportunity to offer you a one on one strategy session with me personally. You can do that by just jumping over to www.pumpedonproperty.com. You can click the free strategy session button on the homepage on the top banner. I’d love the opportunity for either me or my brother Simon to have a really meaningful strategy session and find out more about where you are right now and where you’re looking to go in the future, and help you bridge some of those gaps and get you educated on the market.
Thank you so much for your time. Can’t wait to hear from you or talk to you soon. Bye.