In this week’s episode of the Property Planner, Buyer and Professor Podcast, the team dive into the world of project managing a renovation and they outline the factors to consider before you embark! Dave, Cate and Pete take you through:

  1. The most common mistake; over-capitalisation. It’s very easy to find a property that needs a renovation, but not so easy to find one that will reap a profit. The team take you through the various approaches to renovating that will add value to the property, and those which will not.
  2. Ballooning budget. Unreliable tradesmen, deadlines slipping through your fingers like sand, and alterations to the plan can quickly add up to cause your renovation budget to blow. Planning for delays and allowing for contingencies is critical to a successful renovation.
  3. Unexpected and invisible costs. From finding asbestos to hitting hard stone when excavating, these are just some of the unexpected costs that can come out of the woodwork when your renovation begins. These additional costs burn into your wallet, but removing the issues do not add perceived value to the property. It shouldn’t come as a surprise to hear that prospective purchasers expect to buy a house free of asbestos.
  4. Sharpen your project management skills. Like any major project, a renovation involves multiple moving pieces and parties to corral. The average renovation requires 10,000 decisions to be made. If you do not take the time to plan, arranging your tradesmen, deadlines and budgets can be like herding stray cats.
  5. How do you value your time? Many people do not factor in the cost of their own time and stress when ‘running the numbers’. Be prepared to set aside significant portions of your time for planning, making/taking phone calls, wrangling and negotiating with suppliers, making decisions. If renovating is not your day job, this could mean hours after work and on weekends. Could that time be better spent with your family? Or doing your regular job?
  6. Financing a renovation. The Property Planner shares with you the various ways that you can finance your renovation project. It goes without saying, but the least involvement you can have from the bank, the more freedom you will have.
  7. On the flipside – beware of flipped properties. Purchasing a freshly renovated home can seem like a dream come true, but beware, not all that glitters is gold! If someone is flipping to turn a profit, be weary for potential cut corners.
  8. And of course, our ‘gold nuggets’

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Show notes:

  • Possibility you may overcapitalize: This is the most common mistake when doing a house renovation where the cost of renovations outweighs the amount of value added to the property. Particularly if it’s an investment, where it is a home, you may choose to overcapitalize due to lifestyle factors.  
    • Be discerning – what renos add value to the property and which do not? 
    • Expensive finishes – that de-value quickly.  
    • Pay attention to the area that you’re in – if you have a character home in an aspirational suburb, you may put in some more expensive appliances.  
    • Think about what value you are trying to add – is it extra rent, to sell the property faster, increase the final value? Lift value, lift rent, tenants stay longer, better quality tenant.  
    • What is a suitable return – we have to count vacancy rates, dislodging the tenant. 10% return is a good benchmark – eg: if you buy something for $400,00 – buying and selling costs put it up to $500,000 – so you should be selling it for at least $550,000.  
    • Very easy to find a property that needs a reno, but it’s hard to find a property where a renovation would be profitable.  
  • Ballooning costs – renovating costs can spiral out of control.  
    • Renovation takes longer than expected 
    • Unexpected costs – eg: you’re excavating and find some hard stone.  
    • Change of plans –  
    • Unreliable professionals 
  • Lost time 
  • Project management stress – thinking about it every day, liaising with tradies, timelines, phone calls, suppliers. The average renovation has 10,000 decisions. Relationship stress and damage – having difficult conversations with your suppliers or partner. 
  • Major issues with architect, builders or tradies and the work done. 
  • Think you can make money out of renovating? 
    • How many have you done? 
    • Who is a tradie in your family or friends? 
    • Who are you getting info from about projected sale price? 
    • Invisible issues that need to be fixed – you pour money into it, but it doesn‘t increases the value because there’s an expectation – asbestos, plumbing, electricals, title issues. 
  • Beware of purchasing a flipped property 
    • Home – you know that the owners have probably done a good job.  
    • Investment – if property has been tenanted, you know that teething issues have been sorted 
    • Flip – if you’re purchasing a freshly flipped, vacant and renovated and then on the market – beware of cut corners, on the cheap renovations, permits not sorted, certificates missing.  
  • Financing for a renovation 
    • If you have equity in property to borrow up to 80% and fully finance the renovation, set up a line of credit and fund it yourself. You can draw down on it as you require it.  
    • If the renovation will be structural, the lender requires you to provide council approved plans and building specs. They will dictate how and when you can access the money – across multiple draw downs.  
    • If you need to base the finance off a valuation upon completion, there is more risk involved and that will more likely be need to be done on larger renovations – council plans and building specs need to be done. There are risks – valuers can be conservative and there are no guarantees that the amount you spend is what the property will increase in value.  

David Johnston – The Property Planner’s Golden nugget: make sure your goals are clear, there are different goals for investment v home, structural v cosmetic. What is the return you are looking for. If you are making structural changes, it pays to get an architect or structural draftsperson, it pays to be clear on the vision at the start. They will add value and evolve your thinking. Document your vision, if you’re doing a renovation over a number of stages of a home – do a part and live in the property and get a sense of what you would like to change after you live in it. A final tip is that it can pay to purchase in a location that you can grow into over time – extend the footprint or go up and that can make it affordable to get into your preferred location.

Cate Bakos – The Property Buyer’s Golden nugget: If you’re thinking about flipping, it is often the quick price movement in the area, that facilitates a high profit. So, if it’s time that can do all the talking, have a think about doing a longer-term flip – get a suitable tenant now, get your planning, approval and do the flip in time.  

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