How to prepare for a property renovation

Case study

Sydney’s property market is currently in transition—the rampant price growth has slowed down investing activity and a lot of investors have been exiting the market to look for wealth-creation opportunities elsewhere. Investing in Sydney now may not give you an organic price growth for a period of time, but you can manufacture that growth through strategic planning.

Smart Property Investment’s Phil Tarrant explained: “We've seen a lot of price growth, and you typically find that rents should follow price growth … You can manufacture some price growth [by] doing a renovation and … make a more attractive proposition for tenants.”

Purchasing and renovating a property built in the city entails multiple stages, and it’s best to seek the help of property professionals in order to make the best decisions for your portfolio.

Before purchase: what to look for

Right Property Group’s Victor Kumar enumerates some factors to consider before purchasing a real estate asset for renovation:

Street appeal

You can have the best house interior among all the dwellings on the block, but without street appeal, prospective tenants will most likely drive past the asset.

“They won't fall in love with the house or they won't see themselves living in that house,” Victor said.

Instead of only focusing on the kitchen or the bathroom, work to improve the streetscape just as well, including exterior paint and gardens.

According to the property professional: “Changing streetscape is pretty simple. It could be that it's got horrid paint on the outside [and] we need to paint out into more acceptable colours.”

“[For] gardens, I don't like... grandma plants. This is what your grandma would have planted ... 30 years ago, and it's all unkempt and blocking the house from the street. I try and make it as simple as possible, as pleasing to the eye as possible,” he added.

Structure

Once inside the house, take note of the property’s overall “flow” as well as the condition of materials used for its construction.

Victor explained: “[Are there] poky rooms? Is the kitchen [located] at the back and you've got to walk through two rooms to get to the kitchen? Is the laundry outside … [or] inside?”

‘[Then, ask yourself:] ‘Can it be modernised? Has it got the old archways that was the norm in the 80s—can that be modernised? The reason why I say that is a lot of these properties may actually have asbestos inside … We need to factor that in,” he said.

Look for potential structural issues—cracks around windows, leaks in the bathroom, or floor movements—which you can use to negotiate prices. After that, find other things that need fixing, even if they won’t necessarily add value to the property.

The property professional said: “A good example would be wiring … It doesn't actually add value to the property, but it's essential, [so] you need to do it.”

“Similarly, every property has a roof, so we can dress the roof up … Certainly adds to the street appeal, but doesn't really add that much to the value of property … You don't buy a house without [a] roof, so [work on that as well],” he explained further.

Determining your budget

As you plan your renovation and finalise the alterations you like to do, make a mental note of how much it may cost you.

Do you want to paint the kitchen or replace it? Do you want to put a separate toilet to accommodate the demand of the population in the area? Do you want to change the location of the laundry room? Lay out the changes you want to make, from minor adjustments to major reconstructions, determine the possible cost in contrast with the property’s value, and work backward from there, according to Victor.

Say, for example, you’re lucky enough to secure a $400,000-property in Sydney.

According to Victor: [If] my renovation's going to cost $20,000, then, [I will] factor that into my buying price so that even if I have an overrun in terms of renovations, I'm still in the money [and] I'm not overcapitalising.”

Negotiating prices

There are two things to remember before finalising your property purchase:

1. Aside from the purchase price, consider the potential price of the renovation you want to do and the capital value increase that you want to achieve.

2. You can use the reasons you have for wanting to renovate to negotiate the price down.

Phil said: “A lot of people forget about [the second point]—you can use that as part of your arsenal when you're negotiating … [Say], ‘Look, I've got to rewire the place, I've got to re-plumb it. No value to anyone but that's going to cost me $20,000.’ ”

When you decide to renovate, remember that, first and foremost, it is a wealth-creation strategy. Do not renovate for the sake of doing so—just because you saw it on TV or you just want a glamorous-looking property.

Property renovation, at the end of the day, is all about improving cash flow and achieving better capital growth.

Victor said: “Mentally, a lot of people already see themselves renovating and see themselves painting the walls and all this sort of stuff as they walk into a property. They're falling in love with the action rather than falling in love with the result."

“That's something that you need to perfectly keep in mind—don't fall in love with the action,” the property professional concluded.

Tune in to Victor Kumar’s episode on The Smart Property Investment Show to know more about the different stages of renovation and how it can impact your portfolio in the long run.