Renovating an Investment Property

 

Recently, I’ve been receiving a few questions about renovations. Over the next few weeks, I thought it might be helpful to share some information, numbers and my personal thoughts about renovating.

I’ll also be holding a live webinar:

Mon 23rd November
6pm Sydney local time
Register by clicking here


This week, let’s start with:

– Do I buy properties that need a renovation?
– How much do I spend on renovations?
– What are the economics around renovations?

I generally like to purchase properties that are renovation projects, because historically I have made more money on those investments.

However…

If you have to wait for a renovation project and the value of property is rising in the area you are looking to purchase, then you are better off getting into the market sooner, because it will cost you more waiting for the right property.

We have clients that might not necessarily be able to afford a renovation right now (on top of the purchase price), so our advice is generally that they are best to enter the market now anyway with something that is rentable.

After a few years, that property will generally have increased in value. Once a property has increased in value, it’s possible you can refinance, draw some of the equity to fund a renovation.

Better still, after the renovation, you can consider getting another valuation, draw the increased equity out and use that to help fund the next property purchase.

IMPORTANT:

I only renovate if I know I am going to make money from the renovation.

Ideally, I want to be drawing as much of my investment as possible back out through equity, as quickly as possible.

Here is the breakdown of my numbers:

– $80k budget for a full gut and renovation on a two bedroom unit which includes a brand new kitchen and bathroom.

– For an $80k investment, I’m looking to increase the property in value by $100k to $120k. That’s $20k to $40k in additional equity in the property.

– At 5% interest, the cost of borrowing $80k is $4k per year.

– If we get $100/wk additional rent, that’s a $5k per year increase in rent.

– That’s an additional $1k per year ($5k increased rent minus $4k increased interest), plus we’ve increased the value of the property by $20k to $40k.

What’s your experience with renovations? Something similar, or completely different? Let me know on our facebook page.

 

Did you know Your Empire can manage everything from A-Z for your renovation? I was surprised to hear that many of our clients had no idea. We have our very own list of contacts, valuers, construction managers, tradespeople and even mortgage brokers that do all the hard work for you.

If you want to talk, book a free and confidential strategy session: https://calendly.com/yourempire/15min