Cash on Cash returns for Reno

Discussion in 'Investment Strategy' started by Househunter, 25th Jun, 2018.

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  1. Househunter

    Househunter Active Member

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    What is the absolute minimum people want from a reno to make the decision to go ahead?

    This is making the assumption we all decide on what return we want then head out into the market to find it.

    I am thinking cash on cash return here and also a percentage of cash invested and the return for that.
     
  2. thatbum

    thatbum Well-Known Member

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    If its a property you haven't found yet, isn't it more important to look at the overall numbers for the project? Why focus on just the reno?
     
  3. Househunter

    Househunter Active Member

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    Maybe I should add a little more information to my post:

    This is for a buy, renovate, sell - what are the minimum returns you will take to do a cosmetic reno? Is $20K the right amount to be expecting, $50K or $100K etc.

    I am sure there is a calculation out there some where, like a sliding scale on time, capital and difficulty.

    eg. I have $80K to invest and will do a reno and finish in 3 months. For that time and capital invested - what should I expect for my returns?
     
  4. Propertunity

    Propertunity Well-Known Member

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    You should aim to spend maximum 10-15% of the purchase price of the property on a cosmetic reno. Expected end value should be an increase of $2 for every $1 reno spend, minimum.

    In Australia, you'll find the transaction costs of stamp duty going in and sales commissions coming out, along with tax to pay on any profits, just eats up too much equity to be worthwhile taking the risk, UNLESS the market is going up and giving you organic growth at the same time you are renovating.
     
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  5. Househunter

    Househunter Active Member

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    Great, thanks for the input. Based on what you said I created a little spreadsheet and its turned out some pretty good numbers - please shoot some holes in it! I allowed a 15% reno cost with a 1.5X growth on money in. The difficult thing I see here is finding a property that costs $450K that can be sold for $550K, but thats not unheard of but it may need more than 15% to get it there.

    I have gone by, buy and hold because there is no money in buy, reno, sell. Well I just took it for gospel and didnt do the numbers myself, so i am looking to uncover if its worth it. I tell you what though, based on this, I would spend 3 months to make $50K, that is for damn sure.

    Thoughts? Holes? Missed Expenses? Wrong number inputs?

    upload_2018-6-25_21-18-54.png
     
  6. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    The "ideal" is to get 1.5x the money you put in or even 2.0 x however just because you put that money in, doesn't mean you will get it out.
    You have to be very selective about where/what and how you spend you money on a renovation. You could blow $60k on putting in items that don't appeal to anyone or don't increase the value. To get the good returns you need to know where it's best to spend money and be prepared to put in a lot of sweat equity to get most money back.
     
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  7. WattleIdo

    WattleIdo midas touch

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    Good taste can save a lot of money or at least direct it to the right places, and get better rewards. Less is more in renovating, too. Always remove one item of bling before walking out the door.
     
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  8. Househunter

    Househunter Active Member

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    Yes, you're both correct and the best is sweat equity, but I didn't really know how much money there actually was in renovating. Are there any holes in my numbers up there. Lets just assume I do a lot of the work myself and get a modest 1.5 return on my reno budget, do you see someone getting $50K out of a reno in this market?
     
  9. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Which market are you going to do it in? If it's Sydney then I would be very very very very cautious with a softening market.
     
  10. Househunter

    Househunter Active Member

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    Well I am actually living in Sydney right now but I just don't stand a chance! What I am thinking is to go to Brisbane, buy old style apartments (flats not **** stock) will be able to negotiate quite nicely and then renovate and sell. Get some equity behind me then start holding some quality. Nothing but grass roots hard earned sweat equity. Being a developer, do you see any issues with this or have any tips etc?
     
  11. NHG

    NHG Well-Known Member

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    From memory, most reno education systems say +30%.

    10-15% reno
    10% fees (stamp, sales, cgt)
    10% profit

    So a $300k property would need to sell for $390k.

    A $600k property for $780k.

    There are rule of thumb breakdowns for each room as well. Kitchen, bathroom, etc.

    Will stack up on higher end properties moreso than a small $150k rundown home.

    Look at grid variances. Price difference between a 2 and 3 or 3 and 4 bedroom house in a suburb. If the layouts right, may be as simple as building a wall for $2k.

    I'm no reno expert, mine have really gone up in value by sweat equity. I'm more inclined to build new. There is a lot of stuff out there online.
     
  12. Big Will

    Big Will Well-Known Member

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    Haven’t checked if the formula is correct but noted the following;

    Agents fee seems rather high and also missing LMI for a 90LVR (unless you are exempted).

    Also do you have other income? As your tax rate might be higher.

    Not sure if you are including but assuming you are also missing insurance (if taking out), owners Corp fees, council rates and services.

    Finally I also tend to be a little more conservative but you have only allowed 1 B&P what happens if you find out there are issues with the first property. I would change it to 2-3 B&P before commencing looking and if you use one then you either make more profit or have more money for the Reno.
     
  13. Househunter

    Househunter Active Member

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    Yes very good point on the B&P, I will add that on. Thanks for the input.
     
  14. Sackie

    Sackie Well-Known Member

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    I'd be very surprised if there's a decent profit margin in that after all costs are accounted for.

    Tips? make sure you have your feaso right, before buying anything.
     
  15. craigc

    craigc Well-Known Member

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    Not sure on the calcs but looks like a loss to me.
    Purchase + stamps & legals = $468k
    + Reno $68k = $536k. Plus holding costs of $7k = total cost of $543k.
    Stated to be sold at $550k less agents fees of 4% = $22k (seems a bit high but ok) = sale proceeds of $528k.
    Loss of $15k.
    Don’t think I’d proceed based on that.
     
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  16. TMNT

    TMNT Well-Known Member

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    there are various %s you should and shoudnt spend on renos taught by the courses and experts, and I do agree with them,

    but I go by a profit vs time and put less emphasis on cost

    eg I did a $50k reno which added $100k to the price, however I purchased BMV, and the % rule would have gone out the window, it was a no brainer for me

    If I could find a place that if I put in $500k and made $500k in a year guaranteed, id do it in a heartbeat
     
  17. MWI

    MWI Well-Known Member

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    Many, take this from someone who renovated quite few, I don't even know where to begin and to be honest there are seminar's by Cherie Barber or Jane Slack-Smith an others on this topic.
    Just few for consideration:
    - Have you allocated for total cost and what if market turns down in your reno timeframe, and prices change?
    - Have you accounted for holding cost, or are you doing the reno with cash and not borrowed funds?
    - Have you allocated costs for the time in the market and if to sell the time it would take with borrowed funds? You assume 3 months, so how long to purchase, to renovate, to market, to sell, do you realise you may need to access prior to obtain quotes etc....remember there are settlement times between signed contracts of at least another 3 months if not more?
    - Have you allocated contingency buffer if things go out of control?
    - Will you source out trades or do it yourself?
    - Have you realised that if you flip an IP then you are running a business hence different legal and tax implications, GST, etc....from the start? If you buy, renovate and then rent than a different business structure and tax implication once again.
    - Where you plan to buy have you researched whether Established Capital Benchmark on properties exists, means like disparity say for 3 Bed homes, say they sell between $450K to $700K, other wise if most sell for $450K to $500K, I wouldn't even bother buying there.

    Look, I don't mean to disrespect your dream, but honestly see a property tax specialist first on the structure first, buy just one IP, then do a little cosmetic reno, or BETTER, get a mentor and watch and walk the process with them.
    It is not like the block, so yes equity can be manufactured but you really need to know what you are doing, and there are so many aspects to running a proper renovation flip business!
    Like riding a bike, you may read all the manuals how to ride and turn and break but until you get on it yourself and try and fall and stop and accelerate and slow down, you will never be the best biker rider......?
    Best of luck and keep us posted...do you currently hold any investments? Perhaps a small Reno there first?