Traditionally when you purchased an investment property you would apply for finance from the banks while the remaining costs such as stamp duty, legal fees and renovation costs would have to come out of your own pocket.
These days though many people have equity in their property, so owners are allowed to refinance and draw down on that equity, creating a “cash allowance” for improvements without having to dip into hard-earned savings.
But what if you don’t have enough equity or savings to fund that much needed renovation, and can you justify the spend if you were to carry it out?
A “renovation loan” is one of those financial products available to property owners to do just that. It allows them the ability to access the same borrowing capacity from their lenders (up to 90% LVR) that they did when they purchased the property, provided the end value can be substantiated.
For example, let’s say that you have a property that’s worth $500K which you have just bought at a 90% LVR, so you owe $450K. The bank assesses your renovation plans and decides that the end valuation once the proposed renovations are done will be $600K, an increase of $100K. As the bank will lend on the same LVR this means the bank is now willing to lend you 90% of the new value – $540K. The additional funds now available is $540K less $450K = $90K.
Now as an investor, does it make sense to increase your borrowing capacity to carry out this renovation?
Well first you need to know what the additional rent will be from carrying out this new work. Provided the cost of financing the upgrade is less than the increase in rent, you can walk away with extra cash in your pocket every single week. What a great income generator!
For those of you considering a renovation in the New Year, remember Empire has the only building team that guarantees the project time and budget – a full unit renovation will be completed in 6 weeks or the builder will pay your rent and we also ensure that the price you’re quoted is the price you pay, so there’s never any stress about a cost blowout. This is invaluable for those of you who have ever been through a renovation before and know what a headache they can be.
So until then, have a great Christmas and we’ll see you in the New Year!