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This is the third in a series of articles based on goal setting. One of the most important areas we cover in the University Property Investment course is that of setting your own goals. I break down these goals into six different categories:
• Retire richer
• Retire earlier
• Supplement your income
• Work part-time
• Give up your day job
• All or some of the above!
This week I consider the goal of supplementing your income. The most common approach amongst property investors to making some extra money in the short term is renovating. This has been a tried and tested way of profiting from property. In a nutshell, you buy a property, fix it up and hopefully sell it for a profit. Let’s look deeper into this strategy.
The first step is to find a property. The best properties to renovate are period/character style homes. In other words, homes built before World War 2. These include styles such as Edwardian, Victorian, Federation, terraces, bungalows, return verandah villas and cottages. Many purchasers and renters will pay a premium for upgraded, older style homes.
Once you have bought the property, the next step is to renovate. As property investors, I strongly encourage you to stick to a cosmetic makeover. Don’t worry about adding on rooms or an extra floor. Keep it simple. Painting, floor boards and garden, especially the front garden, are very important features that need attention in a cosmetic makeover. The most important rooms to renovate are the kitchen and the bathroom. This is because these two rooms are the most expensive to repair/replace.
The final step is to sell at a profit. Presentation is crucial when selling any property, especially a recently renovated property. Consider hiring furniture so as to turn the house into a home.
I have briefly outlined the strategy above. Now let’s look at some numbers.
Let’s imagine that you have bought a small period style property in need of renovation for $400,000.
Purchase price: $400,000
Purchase costs (approx 6% of purchase price): $25,000
Renovating costs (no more than 10% of purchase price): $40,000
Holding costs (6.5% interest for 5 months): $15,000
Selling costs (approx 3.5% of selling price): $20,000
Profit 15% (gross): $75,000
Final sale price $575,000
I’d like to highlight three important points:
• One way to contain your renovation costs is to not spend more than 10% of the purchase price on renovating. Just because you spend a lot of money on renovating a property doesn’t mean that somebody will pay you a lot of money for the upgraded property. You need to renovate with your head, not your heart.
• A rule of thumb I teach in class is that you should aim for a 15% gross profit on all costs. In the above example, the cost of purchasing the property, renovating, holding and selling costs totaled $500,000. A 15% profit on all the costs equates to $75,000.
• DO YOUR RESEARCH. If you can’t find a similar renovated property in your area that has sold for $575,000, don’t buy it in the first place. There’s no point in going to all this work, cost and effort if no one is willing to pay you for it in the end.
An extra $75,000 is an extremely good supplement to most people’s income. In many cases, it is more than the annual income from their day job! Once you have paid the tax on your profit, you then have the pleasant dilemma of what you will do with this extra money. Will it be a new car, overseas holiday, renovate your own home, pay off some of your own mortgage, put this money towards the next renovation project …. the options are endless!
The most common way property investors supplement their income is to renovate; buy, add value, sell. However, you need to remember that this is not a guaranteed way of making money. There are no guarantees when investing as there is always some risk.
This article is only a very brief outline of the renovating process. There is much more to learn if you are interested in this strategy. If you have never renovated before, I encourage you to read books, magazines, speak to people who have already renovated and consider enrolling in Property Planning Australia’s University Endorsed Property Investment workshop. Educating yourself will mininise your chances of losing money and maximize your opportunities of making a profit.
In my next article, I will illustrate methods you can use to be more certain of the profit to be made.
Happy House Hunting!
• Written by Peter Koulizos, university lecturer, author and buyers advocate. Peter will be presenting at “The Essentials of Property Investment” seminar in Melbourne on 19th June. Click here for details.