Onto IP2 - what would you do here?

Hi guys,

This time last year I settled on IP1, in Frankston VIC. Just your standard 3 bed, 1 bath, 2 car scenario on a decent-sized 640sqm rectangular block. It will be subdividable in the future - something to think about in 5-10 years when this becomes more a thing in this pocket.

So I'm now looking at moving onto IP2 (even though the market is obviously cooling) since I'm 25 and living at home with low expenses, no rent etc. I bought IP1 for $550k, today it's conservatively worth say $585-600k, so not a great deal.

To get to that $600k and pull out more equity, I'm contemplating making some cosmetic improvements to the home which may also improve serviceability by increasing rental income even if it's by a little.

Here are some images. I was thinking of spending $5-8k doing the following:
- Roof restoration
- Remove window shades
- New front door / sidelight
- New kitchen/bathroom floors
- New kitchen splashback
- Spruce up gardens
- Tile over pergola area
- Paint fences
- Paint ceilings / walls

Exterior: Imgur
Kitchen: Imgur
Alfresco: Imgur
Living: Imgur

What would you guys do? Just give it a clean up and put it back on the rental market? Or spend 1-2 weeks making minor improvements in the hope of a higher valuation? Do you think it needs any work to it?

Not sure what to do, but I do want to maximise my chances of being able to get IP2 in the next 3-6 months.

Thanks!
A

 

What are comparable renovated properties selling for?

What do you owe on the property?

Did you pay LMI?

 

Hello Thanks so much for the prompt help

Comparable renovated properties, say 6-9 months ago, were selling anywhere between $590-$630k depending on variables etc. but right now in the last 1-2 months it's been tricky to gauge as the market has cooled significantly and I feel most recent sold prices reflect that.

That's another reason I'm just not sure if it's the right time to be doing any renovating at all.

Currently owing $480k, and yes I did pay LMI.

 

No worries

The valuers will look at most recent settled sales, and also other properties under contract. In a stagnating market, the valuers may tend to look 'forward', and in a rising market, valuers may look backward. The market sentiment will impact the valuation.

Some lenders may allow you to tap into the equity based on an automated valuation, but in some instances they may not accept it. Depends if your lender is one of those which enables automated valuations. However, note these are at 80% LVR only, so having a $600k valuation will make it useless.

Would renovating add to your rental return? If not, then is it even a worthwhile exercise?

 

How much more rent will the minor Reno bring in?

I would think the Reno or clean up is more for rental increase than valuation improvement.

In the current market, it could be difficult to achieve a higher valuation just by minor reno (bank valuation is largely influenced by the market, and valuers are wuitq conservative ATM)

 

To be honest, apart from a paint (if it actually needed it) I wouldn't be doing anything to it.

Spending 5-8k to gain an extra $10-$20 per week in rental really isn't worth it. It would take you over 5 years to recoup that money in rent. So unless it needed the work, I wouldn't do it. The rental increase wouldn't make much of a difference to your borrowing capacity anyway.

IMO its best to put that money towards a new purchase.

Is there any scope to add a 4th bedroom? Have a look at the layout. That would definitely increase the valuation.

 

It would be more for increasing valuations, but it sounds like it's not the right market to be doing that. Rental wise it'd get around $380 a week which is already at the median rent for the suburb. So to ask for $390-400 in this market might be tricky too. So much competition and choice in the rental market too from what I can see.

Thanks for your help! And this is great to know. A shame timing isn't on my side... Bought the property too late in the cycle, and now a bad time for IP2 haha.

Thanks for your help. Agree it isn't crying out for a reno, just thought it'd be worthwhile if it would increase valuations for an equity pull. And yep, gotta reserve as much as I can for the deposit.

Unfortunately no scope for a 4th br or second bathroom. So I'm leaning on a subdivision potentially in the long term.

 

Does anyone think the opposite - i.e. it's a good time to renovate? Any recent experiences with bank valuations?

 

nope. I renovated when the market was going up. Made no difference as the same houses (complete dumps not renovated since build in the 60s) were bringing the same prices as my most recent valuations. We had to renovate as it was original 60s interior (green wooden kitchen, little blue bath, no shower etc) and we knew it would be difficult to find good tenants in its existing condition. We had been told by the agent only to expect 285 rent in the original condition and we are getting $350 now, and have amazing tenants whom we have had for over two years. If ours was in the same condition as yours I wouldn't bother touching it, your floors are done, kitchen is modern enough and you have a working bathroom I imagine. We spent 30k gutting/renovating and that will take us about 8 years (thats not even including the interest) just to break even from what the extra rent vs the money spent.

 

If i am reading it correctly, renovating to increase rent is not worth it but to renovate to sell.

 

I'd put the reno money towards IP2 deposit as it sounds like you won't be able to extract that money from IP1 given it won't value up to what you need it to. If a $10k reno was going to result in say a $20k gain in equity which you could pull out to use for IP2 then it might be a different story as that would get you closer to a deposit for the second one. Once you're restricted for serviceability and can't buy more then improving the properties you've got may be the best use of your money

 

Sounds like its best to leave the IP as is - given no guarantee of value add or rental increase.

Best invest the funds you were going to put toward the reno elsewhere.

 

Have you had a full valuation done with your current lender? You might be able to reuse the LMI you paid there to go again.

 

Wow, that's crazy. I've got no chance in a cooling market then.......

 

Thanks for the advice! I'm leaning towards just giving the place a quick tidy up, then pooling the funds towards IP2 deposit.

Current lender (NAB) actually did a drive-by valuation and it came back as purchase price... haven't done a full valuation with them but I'd be iffy as to whether they'd let me borrow what I need to for IP2. Played around with a few lending calculators and they're erring on the lower side in terms of what I could potentially borrow.

 

Hi Jess can you elaborate on this some more? So you can pay one lot of LMI if you buy two properties in fairly short succession?

 

The valuer on mine put in the comments "market sentiments changing and something about market cooling at end of 2017 (this was around Oct 17). I think the valuers start to get conservative when they hear doom and gloom in the media and like to cover themselves, and for good reason I guess. I think my val came in where it should have, however the market was just going stupid. Had I have been selling I would have got probably 40-50k more than my neighbours properties got, but the valuers don't seem to take that into consideration when there is talk about market being at peak.

 

Fair enough. It sounds like valuers are conservative every day of the week. There's always an excuse isn't there.. haha. I think I'm sold - major reno down the track, a tidy up in the immediate.

 

If you've paid LMI on one purchase, you may be able to get equity out back up to your original LVR, and only pay an LMI adjustment rather than a whole new premium. This new borrowing can then be used as a deposit on a new property (in theory - many lenders aren't overly keen on cash out over 80% for investment use anymore). I've recently done this with NAB for a client who got $90k out for landscaping on their home - I think it cost them $600 in additional LMI.

 

That's really interesting and not common knowledge - thanks for sharing Jess!