The right time to perform a renovation - Major or Minor

Discussion in 'Investment Strategy' started by NWHT, 7th May, 2018.

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  1. NWHT

    NWHT Well-Known Member

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    I've recently (March 2018) purchased an in investment property in Herne Hill, Geelong. The property was purchased at auction for $416k and I negotiated a 3-month settlement with the Vendor. The house is on an averagely sized block 480sqm and the house could do with some TLC. Noting the increased growth of investment in Geelong I am unable to find other properties currently on the market for anything less than $480k.

    I plan to perform a smart renovation to increase the properties value to bring in line with other renovated properties that have sold recently, these typically sell for $580k upwards. Having a father who is an ex-builder and being in the construction industry myself I would perform the majority of the works and get in contracts to perform required works.

    Given my current situation, I have three renovation options, all range in size, cost, time and effort.
    See attached image for indicative alterations.
    From my research and the current market climate, I believe the number indicated are reasonably accurate, maybe slightly conservative.

    Option 1:
    Very basic renovation
    Expected cost: $8,000
    Expected property revaluation: $430k-$440k
    Works:
    - Install LED's throughout house
    - New carpet in bedrooms, living room and back rumpus
    - Paint external
    - Landscaping

    Option 2:
    Minor Renovation
    Expected cost: $20,000
    Expected property revaluation: $450k-$480k
    Works:
    - Install LED's throughout house
    - Install Fans in bedrooms
    - Bathroom Alteration (stud wall removal and reposition, reposition toilet and shower, new bath, plumbing, etc)
    - New carpet in bedrooms, living room and back lounge
    - New laundry unit
    - Open up wall between kitchen and rumpus
    - Paint external
    - Landscaping
    - Added rear bluestone pavers on ground level

    Option 3:
    Major Renovation
    Expected cost: $60,000
    Expected property revaluation: $580k-$600k
    Works:
    - Demolition of back lounge and reconstruction of new room, including Kitchen/Dining/Living areas
    - Front entrance repositioned
    - New powder room
    - New Laundry with floor to ceiling windows
    - Bathroom reconfiguration and floor to ceiling windows
    - New Master bedroom
    - Central lightwell to allow light to flood into laundry and bathroom
    - Central lightwell to be landscaped with native shrubs
    - Paint external
    - Landscaping
    - Wooden deck at floor level and pergola

    After all expenses ($416k purchase + plus stamp duty @ $22,880 + other at $4k) I have roughly $80,000 available. Saying that, any amount left over would be kept in my offset for my current PPOR to reduce interest repayments.

    After any renovation I would plan to revalue then assess the market and subject to serviceability analysis, invest again.

    What I'm seeking are astute investors that have an understanding/ knowledge of performing renovations for increasing the properties value to invest again.

    An indication/discussion of which renovation I should perform would be highly appreciated.
     

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  2. Propertunity

    Propertunity Well-Known Member

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    As a general rule-of-thumb, you want back a minimum of $2 worth of end value for every $1 you spend on a reno.

    So in the first instance, I'd pick the reno that gives most end value increase for each reno $ spent. Think about the rental return also. Don't spend $20K on a reno if you cannot get an increase of at least $20pw (and preferably $40pw or more) i.e.a minimum 5% return.

    After that consider:
    You don't want to increase the value of the property so much that it is way over the median price for the suburb you are in. i.e. if the median is $500K then don't do a reno that makes it worth much, much more than $550K. That is called over-capitalising. This will mean your property will not grow in line with the suburb to the same extent a median priced property would. Also your rental yields will be lower.

    Then also consider rental demand for the typical type of property that tenants want and can afford. i.e. don't build/reno to make a 3brm 1bath 1 car into a 4brm 2 bath 2 car if most renters there are targeting 3brm properties.

    Finally, consider the length of time your property is "off the rental market" while being renovated. A quick cosmetic reno that takes 2-3 weeks will get your property rented and earning an income way faster than a high end reno that takes 6 months and which may only get you an extra $30pw (say) in rent.
     
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  3. Ed Barton

    Ed Barton Well-Known Member

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    Are you saying the yet settled property has increased in value at least $64k (15%) in one or two months?

    As Propertunity has noted there's no point spending money unless it is going to get you more rent or an increase in valuation (if that's what you are chasing to continue investing).

    I wouldn't call this a renovation, but medium term maintenance. Things like paint and carpets wear out and need work every 5 -10+ years. Landscaping needs work done every ?? years if neglected. Why LEDs?

    So you expect that by spending $8k the place will value at 430-440, which is 40k below what you say are comparable places in the area. I don't understand.
    Have you considered option 0 - doing nothing?
     
  4. hobartchic

    hobartchic Well-Known Member

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    It sounds like you are doing this property up to resell? For tenants I would do the minimum to get it neat, appealing, safe and tidy. Lots of cleaning and maintenance.

    I would not bother with LEDs personally. I know they are the new thing but I'm not a fan of the light. If you have modern lighting in already I would skip this. If you need new lights talk to a lighting shop consultant/ assistant for good ideas.

    Tidy up the garden (cost low)
    Install fans/ cooling if in a hot environment and it's needed
    I would rewire if an old property but others on this forum disagree (it's one less thing for buyers to worry about though and a selling point for older houses)
    Paint
    New flooring if needed
    New bathroom if an old bathroom - gut and redo
    Update kitchen if old
    Maybe a small deck
    Maintain/ update heating system

    The rest of it would be lower on my list.
     
  5. hobartchic

    hobartchic Well-Known Member

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    Forgot Clean/ paint walls
     
  6. NWHT

    NWHT Well-Known Member

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    Thanks @Propertunity, all very good points to consider and I appreciate your comments.
    I agree with not over-capitalising on the house with the reno performed - the streetscape itself could present better with a few houses that could do with some maintenance, however, the Herne Hill suburb itself has a range of established, newly constructed and renovated houses.

    I've discussed the renovation options with three different real estate companies in Geelong and they came back with mixed responses. 2 out of the 3 indicated that a bath should be installed to capture families with smaller children (since there are 3 schools in close proximity), they all agreed that new carpet should be laid and touch up garden. This aligns with my Option 2 and the agents expected an increase in rental from $350 to $380-$390pw - which is what you are suggesting.

    Thanks @Ed Barton, not quite, I'm suggesting that the property I purchased was below the market median price due to the house requiring maintenance and a renovation. Other properties in the area that I would consider "average" in quality are selling for at least $480k plus. I'm hoping that by performing a renovation that I can bring my property in line with the median suburb price.

    An 8k renovation would purely be to bring it to a standard that I could find (good) tenants) for the minimal amount invested.... I agree with your comments this wouldn't be considered a renovation but moreover property maintenance. I've indicated that I don't believe 8k would bring the house to a comparable standard with those properties selling on the market at the moment.
     
  7. NWHT

    NWHT Well-Known Member

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    Thanks @hobartchic, all good points and those I am considering. I'm primarily looking to hold the property for at least 5-7 years, and have it tenanted during that period.

    The main reason I'm enquiring as to what level of renovation I should perform is so I can eventually obtain an increased revaluation on the property to withdraw equity gained and invest again (subject to my serviceability analysis).
     
  8. New Town

    New Town Well-Known Member

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    Your competitive advantage is building/construction. Use it to do a thorough reno that increases value and rental, secure a better tenant and reduce ongoing repairs and maintenance. I'd go option 3 :)
     
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  9. hobartchic

    hobartchic Well-Known Member

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    Might make more from renovating and holding for a shorter period. I would use your advantages (sweat equity and skill) to minimize spending and maximize return.
     
  10. Beano

    Beano Well-Known Member

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    Do you really mean 5-7 yrs or is it suppose to be 50-70 yrs ?
    Changing houses every 5-7yrs is very costly with CG tax , legal cost, stamp duty , RE fees etc
    Keep the hen sell the eggs!
     
  11. JacM

    JacM VIC Buyer's Agent - Melbourne, Geelong, Ballarat Business Member

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    Quite simply, you should choose the option that makes you the most money. :cool:
     
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