updated 4th October 2016
As seen earlier with older property strategies, there are many advantages to renovating. The main one being the ability to instantly create additional equity that you can access for further investment or to create an equity “buffer” to manage your risk better. Spending money on a renovation if done right is a very efficient use of your money.
Renovations don’t have to be major to add instant value. Cosmetic renovations have lower town planning requirements and don’t carry the risk inherent in building. They can be as simple as a new kitchen or bathroom, fresh paint and floor coverings. This increased value can assist by also enabling a higher rental return, not just creating more equity. It can also lead to higher tax advantages due to higher deprecation.
Sometimes you can buy properties under market value that need renovation. However, these properties in recent times are highly sought after and so competing parties frequently bid this benefit away.
Another positive is that if you are purchasing these types of properties, most of the money you pay is going to the ‘land component’. It is the land which appreciates in value, while the building on the land depreciates. So with a higher land component you are ensuring solid future growth.
Inexperience, however could cost you more money if you don’t anticipate structural, engineering or council permits. You may not see trouble spots until half way through a renovation (electrical, plumbing or structural issues). It’s very easy to underestimate the time, cost and work involved in a renovation;
You would have to ensure that the money spent is going to give you the increased value in the property and that you haven’t over-capitalised. You have to ask yourself, will you be able to create enough equity on the sale or revaluation to make it worth your investment in time and money? Can you increase the rent sufficiently in the area to make the exercise worthwhile?
Doing a renovation requires a lot of work if you do it yourself. Even if you don’t do it yourself, it requires a lot of management if done by others.
It also takes a lot of time to find the property that can make the numbers work.