Renovations are a great way to lose your money if you make these mistakes | With Greg Hankinson

Have you considered getting involved in property renovations?

If so, then today's show is just for you. Making a tidy profit renovating a property seems like an attractive proposition, doesn't it?

And that's why more real estate investors are turning to renovations: you know, buy low, renovate cheaply, add substantial value. That's the aim of their game.

Sounds simple enough. But it's not really that simple.

Sure, anyone can renovate, but not everyone can renovate for a profit. If you've been reading my blogs and listening to my podcast, you know that my preferred investment strategy is to add value. It is to manufacture growth through renovation and development.

So in today's show, I chat with Greg Hankinson, director of Metropole Constructions. Greg has completed thousands of renovations. We're going to give you some tips and share some traps to avoid if you're going to get involved in property renovations.

And at the end of the show, I'm going to share my mindset moment with you.

Renovations Insights and Mistakes

The BRRRR strategy

• Buy, Renovate, Rent, Refinance, Repeat
• Flips flop
  • You need to manufacture significant capital growth - upside to cover the costs and unless you do a structural renovation this is too hard to achieve – can't achieve with cosmetic renovation.
  • Patients take time, cost more, require permits and the associated costs could easily add 50% to your renovation budget.
  • With cosmetic renovations, you can't really get two dollars for every dollar you spend
  • Why they flop - Transaction and holding costs, tax, unrealistic expectations, and flipping in a fickle market

Which tasks to outsource

• Anyone can renovate, but that doesn't mean they can make a profit, so let's look at some tips to make your renovations more profitable.
• What needs licenses – the electrician, plumber, any building works over 5000 in Victoria and different in other states
• Hire a project manager; don't do the work yourself.

Mistakes:

1. Choosing the wrong location

• Do you need the right market location where there is a significant differential value if you renovate.?
• This is unlikely in cheaper blue-collar or regional areas.
• Become an expert in your location can't rely on Internet reports
• avoid Main roads

2. Wrong Property

• Cosmetic renovations – must be 20+ years old and of significant value, a lick of paint is not enough
• Structural – probably 50+ years old – must have good bones

3. Refurbish versus renovate

• What's the difference?
• The refurbishment has no direct equity creation no additional capital growth but it does increase the rental returns and possibly some depreciation benefits
• Refurbish and not renovate? When a good property needs refreshing, kitchen bathrooms are in good nick, all the basics are sound, when if you renovated it would be a risk of overcapitalizing

4. Not getting the appropriate permissions

• Check the permissions required
• Council & building permits? Owners corporation?

5. Avoid overcapitalizing

• It's very easy to find a property that needs a renovation, but not so easy to find one that will reap a profit.
• Work backward – establish a post-renovation market appraisal on the property, subtract the purchase price, associated costs, interest, and a healthy buffer and profit margin. What's left is your renovation budget. As a rule, keep the renovation budget to 10% of the market value of the property

6. Not allowing a sufficient contingency amount

• Once a budget is established, allow a contingency based on your experience level and the extent of the renovation works. Allow a little more if structural works or there are planning/building approvals required and a little less if the works are purely cosmetic.
• 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.
• 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.

7. Tailor the renovation for the target market

• Becoming an expert in the area.
• Understand local demographics By knowing what the market expects, you can tailor the works to suit that market and therefore not spend on things that may not bring a return on your dollars.
• It's not how you want to live – think…The Block

8. First impressions matter

• The wow factor –
• Natural light, fresh paint, new floor coverings, and window furnishings go a long way towards transforming a tired old property into something that will be sought after.
• Often it's the little things that can make or break a successful renovation. Neutral colors allow tenants to create their own identity with their belongings. Dominant colors and textures tend to close in the wall and make spaces feel smaller than they are.
• If you're doing cosmetic renovations make sure the changes you make are highly visible
• Don't waste money rewiring or replumbing (OK for structural)
• New floor coverings, carpets polish floorboards paint, blinds, air conditioning
• Make people think you've spent more money than you have
• Houses - cement render the exterior

9. Kitchens and bathrooms sell properties

• Beware of diluting your dollar by doing half the job
• If you renovate the kitchen but leave the original tired and rundown bathroom, it will de-value the kitchen and vice versa.
• If the budget doesn't allow for both of them, it may be worth deferring renovation works

10. Avoid DIY

• Unless you're a skilled tradesperson, don't get lured into to misconception that you'll save money by doing the work yourself.
• TV shows like the block glamorize and simplify the renovation process.
• In most cases, it will cost you the same or more but always take you longer if you're doing the work yourself, therefore resulting in poor finishes, delayed completion dates, and unnecessary holding costs due to the extended completion times.
• 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?

11. Remove the emotion

• Adding value to an investment property should be run like a business.
• There's no room for latest fads in design and you shouldn't be trying to make the cover of Belle magazine, that's for your own home.
• The purpose of renovating investment properties should always be about maximizing both the rental return and capital value of that property.

12. Get a good team around you

• Renovation involves coordinating various tradespeople - who are busy and unreliable Remember, they're the experts.
• They've done it before and probably seem the mistakes others have made. By getting close to your trades, you'll avoid falling into the same trap.

13. Don't be stingy

• Stretch – you normally get only one chance per property every 20 years - do it right - don't be cheap
• Thrifty is good, cheap is bad
  • There's a lot of cheap products in the market place these days, especially online. In my experience, cheap stuff is cheap for a reason and will cost you more in the long term.
  • Take engineered timber flooring for example; you can buy an imported laminated timber board from your local hardware store starting from about $19 that has a lifespan of 1-2 years if you're lucky. Same deal with paint, carpet, window dressings etc.
  • Cheap just doesn't last and it's a false economy to suggest otherwise.

Ask yourself the tough questions

• "Do I have time to execute this renovation effectively?"
• If the answer to this "No" or "I think so?" Consider paying a professional to manage it for you.
• The additional cost will most like be offset by the works being completed in a more timely manner, to a higher standard, and with a guarantee.

Links and Resources:

Michael Yardney

Get the team at Metropole to help build your personal Strategic Property Plan Click here and have a chat with us

Greg Hankinson Director Metropole Constructions

Why not see how Metropole Constructions can help you.

Shownotes plus more here: Renovations are a great way to lose your money if you make these mistakes | With Greg Hankinson

Some of our favourite quotes from the show:

"I know last year, during the difficult times of letting properties with COVID, our team at Metropole constructions did a lot of refurbishments and quite a few renovations, and those properties, when they got put back onto the market, actually got leased very quickly." – Michael Yardney

"It's very easy to find a property that needs renovation, but it's not as easy to find one where you're going to reap a profit at the end." – Michael Yardney

"You get one chance to do this every 20 years or so. Do it right, don't be cheap." – Michael Yardney

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