Renovation riches: Q&A with Brendan Kelly

I decided to get into property with my partner at the time, who is now my lovely wife. We thought if property was going to cost us money, we should find a place that would do something for us in return.

I had heard around the traps that property would grow in value. Even back then, it was a case of wanting to maximise this. We were asking ‘how do we get the most out of our property?’

Based on my budget, I went into an area I could afford – in this case it was Richmond, Victoria. I didn't have a lot of money so I knew I would need to find something relatively special and relatively cheap.

In the end, we bought a milk bar, with a shopfront and two bedrooms out the back. It was an abysmal mess. We purchased it for $120,000, lived in it and renovated it, which meant we were combining our lifestyle with our investment activities.

It was our first home and a stepping stone. We did not purchase it with ‘forever’ in mind – we purchased it to make money as best we could. We knew it was our temporary home but in the mean time, we wanted to ride a wave of growth.

After the renovation, we sold it for $420,000. That's what we needed to get started in investment.

Q. What is the biggest mistake you have made?

One of the biggest lessons I have learned over the years is DIY is not necessarily the answer.

On one of my first buy-reno-sell projects, I did it all myself. I targeted the project at three months and it took me nine months to finish it. There were increased holding costs and the market had moved by then, so I did not make any money on that deal.

For other investors, I would strongly advise going with the right trades and to budget enough money to pay for their labour. These guys are fast, they are efficient and they do the job better.

Another lesson is that you can overcapitalise. At the start, we took a live in, add value, sell approach. We wanted to be comfortable while living there so we were happy to pay a little bit more. However, as a strategic approach to renovations, I would not have that mindset.

You don't build a house you want to live in – you build what the target market wants. In addition, you should focus on cosmetic rather than structural changes. If you put insulation into walls, no one will ever know you have done that. But if you paint, everybody will say, "wow, the house looks so much better".

You don't build a house you want to live in – you build what the target market wants

Q. How can investors identify the right suburb to buy into?

From the very early days, I came up with an approach I still use today. First, I work out my budget. Then, when I know my cash amounts and my borrowing capacity, I figure out my buy price.

In looking for the right suburb, I try to find an area that I have the capacity to buy into, then study prices in the suburbs around it. You want to find a suburb that has not moved yet, surrounded by suburbs that have.

For example, on my first purchase, all the suburbs around Richmond had gone up in value but Richmond had not, so Richmond had to happen at some point. I call this the ‘Funnel Effect’.

Q. What is the most common misconception among investors?

Many people still believe ‘never sell’ is the way to go. 

If you think about how market demand works, you'll find that there are waves of growth. There are periods of great growth and periods of flat growth, or even decline. If you're holding a negatively geared property during those periods of decline, your money is not working for you.

In these cases, you would be better off selling, finding a suburb that is going to go up in value and buying into that. The costs of buying and selling are well and truly offset by the growth you would get in a suburb with better capital growth.

Frankly, in property money is made when the properties experience capital growth, not in the cash flow. What you want is deals that create capital for you. It could be a value-add like a cosmetic reno or a development or riding the wave of growth. Getting more capital is your answer to financial freedom.

Q. How important is financial education for Australians?
What I know now has been learned through experiences and people willing to share their knowledge. If I could rip my head off and put it on young shoulders, that would be awesome.

There is a lack of that financial wisdom that occurs in schools and there is a lack of understanding about wealth creation in the community. Because we have such great opportunities in Australia, if we were able to educate people, there would be an opportunity to lift the entire wealth of the country.