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Thinking fast capital growth? Think renovations…

By David Gordon

The appeal of the home renovation is pretty straight forward; you buy low in the market, add a few extra touches and sell or rent out the property for a neat profit.

It’s a simple plan and according to Patrick Bright, Buyer’s Agent and author of The Insider’s Guide to Renovating for Profit, it’s one of the sure ways to manufacture both capital growth and cash flow.
“With property renovation, you’re in the driver’s seat. Rather than just sitting back and waiting for the market to deliver capital growth over time, you have the opportunity to accelerate the process by manufacturing capital growth.”

However you need to be careful and do you research, renovating isn’t for everyone. Fortunes have been lost in the reno game and it’s not as simple as knowing which new colour scheme will suit the lounge room.  Bright says “What really matters is if how well you can spot an opportunity and if you’ve done enough research to forecast your profit margin correctly.”  You need to develop your eye for knowing what a renovated property will sell for in its market. Treading lightly in the research and planning phase can lead you to overcapitalising and making a loss.

Selecting the location
Just like an unrenovated investment, you want to be looking for a property that is in a good area. The same old basics apply: a property that is close to schools and shops, has good road infrastructure and excellent access to public transport.  Essentially you want to be looking for a property that is in demand, regardless of its need for renovation.   You want to avoid properties with unappealing features that can’t be changed with a renovation, such as being next to a freeway.  Something to keep in mind is to buy the worst house in the best street. This will give you the widest scope for making a return.  Bright says that spotting a property with good renovations potential comes down to a simple question. “You’ve got to ask yourself this: what do you want? You want to get better than average growth and better than average returns. That means your first step will be finding out where you could get this.”

Selecting the property
Once you find your suburbs, you need to look for which types of properties are likely to outperform the market—houses, unites or terraces. After this you can prioritise finding a property that is best suited to a renovation, without you overcapitalising.  How you do this is just a numbers game. Bright says you need to start with the end in mind, what will you be able to sell the property for when it’s renovated? Then you can subtract the original purchase price, renovation costs, holding costs and you’re left with your profit margin.  Bright says you should allow these numbers to guide your renovation decisions and which property to buy.

Measuring the property up
Once you’ve got a property in your sights, it’s time to focus the lens and make sure you’re getting exactly what you think you’re paying for. Before signing a contract you want to have a number of inspections done. This could save you a bundle down the line.  The two most crucial inspections are the building and pest inspections.   The building inspection could reveal major structural problems, in which case it’s best to leave it alone.   A good way to be thorough and methodical is by writing a renovation checklist of all the things to look at. These could include guttering and floorboards, and wiring and plumbing, especially if it’s an older house.

Managing the reno
Once the property is in your hands you’ve come to the steepest hill. But before you start ripping out the kitchen top it’s best to decide who will be managing the whole project.  Many people take it on themselves without realising how time consuming it can be and what is really in store for them.   Ultimately the success of the project will depend on good preparation, which means planning for contingencies and keeping track of the renovation progress everyday. It’s good practice to keep and file every transaction and piece of paper you use to track time and every dollar spent.
A good way to keep the costs down is to play each supplier against the other.   However the most important factor in whole the project is sticking to the budget.  Another good cost saver is finding a single place for all your materials. Once you’ve shopped around first, finding a single supplier allows you to negotiate bulk discounts.

extracted from Your Investment Property Magazine

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