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Renovations in a flat market

Discussion in 'General Property Chat' started by MTR, 10th Nov, 2015.

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  1. MTR

    MTR Well-Known Member Premium Member

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    Not sure whether I should post here?

    Prior to developing I have used this strategy a number of times, few years ago .....with minimal success that is why I stopped.

    My profits were purely from the rising market and even if I did not renovate the property I would have made some gains.

    I am interested in feedback from those who use this strategy in any market, curious how it is working for you? I think if you have a template that works in any market then you are on good thing and just repeat the process.

    Personally I found renovating too much hard work and you need to be able to do some of the work to keep the costs down, not my thing.

    My guess is that with this strategy there would be no point selling due to the associated taxes, CGT, Stamp duty, goodbye profits. Accessing equity I expect would be the way to go.

    Anyone doing this in a flat market and what entry level works for you.


    MTR:)
     
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  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    This works for us with SA being flat until recently.

    When the market is flat there are more desperate people around who have to sell cheaply. If the homes are run down then they appeal to even less buyers, allowing a possible discount.

    I don't like selling - as you say CGT / SD / LMI / Agents fees etc eat it up. Can get them revalued and use the topup money to repeat the process indefinitely. If yields are healthy, you use multiple entities for buying in, then serviceability lasts indefinitely :)

    Example
    $50k deposit -> $200k house -> $10k reno -> $260k house -> $84K topup -> $200K house -> $10K reno -> $260k house ... see where this is going? :)

    As part of PM business, also oversee or project manage renovations. Getting a good collection of tradies going now ;)
     
    Last edited: 10th Nov, 2015
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  3. melbournian

    melbournian Well-Known Member

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    i think if anyone was going to do it - it would be an the upper end of the market. Like you know "james hird" wife who did toorak house by total refurbish and resold it for million plus more. i think most of her work would be like proj management and design choices. Otherwise it would be easier to stick to devs.
     
  4. Xenia

    Xenia Adelaide Property Manager Business Member

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    Whether you are selling, renting or refinancing a good renovation provides value.
    If you are keeping the property, you can benefit on the refinance on improved condition and also a depreciation schedule on the new fixtures and fittings within the property. You can also gain some accounting benefits by getting a quantity surveyor to write off the old items before the renovation.

    If you are renting, you can improve not only the rental yield but also reduce the vacancy time on the market. Tenants have a lot to choose from and a question I'm asked often is "will these carpets be replaced, will this be painted, are they planing on any renovations" good tenants want good properties and the tenants that will "settle" for a crappy looking property are not always the best tenants.

    For selling - you can achieve top market price for a property that looks better than others for the equivalent space (building area and land size). Case study this week - we have a house on the market at Ingle farm, we got over 50 groups of people through the first open inspection and the offers coming in are above the top end asking price. Still in negotiation but this home is going to outperform all other comparative sales for that area and for the size of the house and there is only one reason - it is fabulously renovated and presented at it's very very best. Credit to the owners they did an amazing job on this reno and will reap the rewards.

    Keep real estate looking at it's best - it always ads value.
     
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  5. Xenia

    Xenia Adelaide Property Manager Business Member

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    Oh MTR - I have project managed renovations quite a few times and the heaviest thing I picked up was a mobile phone. You can add profits and don't have to do it yourself. It does take some time to get a reliable team together and good tradies and maintenance people are hard to find, start by trying out a few with smaller projects and see how they go.

    My best friend in Adelaide does larger projects, commercial and larger developments not for herself but as a builder. She project manages the entire thing and other contractors do the work.
     
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  6. Azazel

    Azazel Well-Known Member

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    I think it can work if the market is flat and you're able to buy 'under market value'. Do a minor reno and get it up to market value, even better if the market rises a little in the mean time.
     
  7. melbournian

    melbournian Well-Known Member

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    on a personal note renovations can be satisfying - i personally like to do kitchen renos (that's just me - have done 20 odd kitchens before, custom build, ikea, flatpack, import from china) using various appliances and counter tops (stone, quartz and laminate).
     
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  8. Ozzie in Texas

    Ozzie in Texas Well-Known Member

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    I think it makes good market sense to maintain your IP. It's what differentiates properties regardless of flat market or crazy buying frenzy. A tastefully well maintained/renovated property always wins better returns, either as a rental or when selling.
     
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  9. MTR

    MTR Well-Known Member Premium Member

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    What's your timeframe for Reno? holding costs could hurt
     
  10. Ozzie in Texas

    Ozzie in Texas Well-Known Member

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    MTR, I would always stage my renovations in between tenants.

    And of course, the budget depends upon available cash flow.....but I will always try to do at least one major project/renovation in between tenants so that the property remains contemporary and in demand.
     
  11. Elives

    Elives Well-Known Member

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    how would this be possible?
     
  12. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    I personally built up my portfolio from constant buy-reno-reval's of properties purchased below market value in a flat market. The magic post reno increase in value has always pinged between 23-26%, leaving sufficient funds to release all purchase and renovation costs from day 1 of renting.

    Meanwhile said properties have been CF+ with a scraping of depreciation, so a strong result all round.

    The key to get it to work is to fundamentally find properties which are not meeting the areas target market - preferably of a median price build style and block size, but with substandard quality fitout. Purchase significantly below median and then you have guaranteed return to work from.
     
  13. Be Developer

    Be Developer Property Developer Business Member

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    1. Buy-reno-reval may work
    2. Buy-reno-resale for profit is tough gig.
     
    Last edited: 16th Nov, 2015
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  14. MTR

    MTR Well-Known Member Premium Member

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    I agree, the reason is the costs - stamp duty on purchase, CG and selling costs.
     
  15. mcarthur

    mcarthur Well-Known Member

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    Corey,
    Do you do the formulaic (upto) 10% of the valuation on reno?
    If so, I assume you're getting a 2x-2.5x multiplier on the reno: 10% reno, 23-26% reval?

    Can you quantify a little the "significantly below median" purchase price? Are you getting <10% market price or even better? I assume then that the reno is merely bringing the property upto the median property rather than above it, hence you're really making the money on the purchase and some multiplier effect for the newness of the renovation?
     
  16. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    I don't use a specific percentage, it provides no real value to this kind of strategy but to try keep punters from overcapitalising (ie why Cherie Barber goes on about it).

    I'll give an example of one I've done (not amazing numbers, but the property has some other fun attributes - corner subdiv block):

    Purchase Price: $185,000
    Renovation Costs: $7,000
    Median Price: $229,000
    Post Reno Valuation: $226,000

    A large amount of the strategy is certainly about buying extremely well - however valuers will not allow you to realise the value difference whilst the properties remain in their current state.

    There's a reason why these properties sit well below the median - for instance with this property the kitchen was heavily deteriorated, the smell made it impossible to breath. The suburb is a very working class area where first home buyers and lower income families are purchasing their first homes - so undertaking renovations is generally last on their mind OR unable to come up with sufficient capital to make the purchase + renovations, compared to financing a higher purchase price. The property in question wouldn't have valued at 219k based on it's original condition (valuation minus works complete), so a considerable amount is gained in a small cosmetic reno on the property.
     
    Last edited: 16th Nov, 2015
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  17. BuyersAgent

    BuyersAgent Well-Known Member Business Member

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    Couple of great posts there @Corey Batt

    For me similar start to Corey and these days buy reno hold reval is easiest strategy to make work for most investors. Let the market help you out with some capital gains from time to time.

    However it is possible to do buy reno sell "flipping" but in my view doing one or 2 accidentally in a rising market is different to becoming a professional at it. Nothing wrong with buying into rising markets, just be honest about where the profits came from exactly as @MTR has done above.

    To make flipping work in flat market it isn't about the flat ness it is about other market metrics and some very property specific characteristics.
     
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  18. MTR

    MTR Well-Known Member Premium Member

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    Hi BA
    Also, I think if you are not prepared to get your hands dirty will this strategy work?? Just saying..
    My partner painted the house, polished boards, tiled the kitchen, landscaped garden etc.
    My point is if we had to employ tradespeople to do this, we would have made very little or nothing.

    Also those that play in the higher end markets, for example period homes in blue chip areas, $1M+ can make some very serious $. However, its also much higher risk proposition ie holding costs and smaller number of buyers. I had a g/friend who was doing this, however she stopped doing this because the timeframe was around 18-2 years per project so she decided developing property was far easier.

    MTR:)
     
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  19. Azazel

    Azazel Well-Known Member

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    True, a rising market does not an expert make.
    Plenty of people have learnt that lesson the hard way when renovating in a low market.
     
  20. BuyersAgent

    BuyersAgent Well-Known Member Business Member

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    I would agree a decent percentage of my renos in the early days were "sweat equity" - of course nothing wrong with that but a pure deal shouldn't require it. Technically still possible to make a profit with trades only but yes much harder.

    Agree higher price points can lead to bigger real profits but also means more $ on the line.

    Re your g/f - a cosmetic reno shouldn't take 2 yrs :eek: unless you living in it and riding a boom so taking your sweet time.