In the past I’ve written about the premiums that can be paid for unrenovated properties and how difficult it can be to buy well at the start when everyone’s out there looking for the next “Block” project. Today I want to look at it from a different perspective – how renovated properties can often be extremely good value compared to their dilapidated cousins.
I’ve often come across investment properties where the owner has recently completed a renovation on an apartment only to find they’re barely getting the renovation costs back on the property once all the work has been completed and would have been better leaving it in it’s original state and selling it on.
So why is this? Well, as I mentioned earlier, one of the main reasons is that many people carry a renovation project on their bucket list so the emotional drive to purchase a renovators delight often means the concept of “buying well” at the start quickly goes out the window.
Another reason is that people grossly underestimate how much a renovation will cost in terms of both time and money. The project may be something you can do in your weekends, saving you much of the labour cost that makes up the total expense, but it can be easy to underestimate how many weekends that will be and how hard the work is. It’s not uncommon to see owners still at it 2 years later after having lived in a half finished house for the majority of that time.
Build costs themselves are also grossly underestimated. Ask most people how much it would cost to renovate a 2-bedroom apartment and they will tell you a figure between $40K and $50K for a city apartment. That will cover you for the basics, but once you add lighting, blinds, insurance and GST, the quote from the builder can easily hit $70K+. Start removing walls or moving the plumbing and you can add another $30K.
There was a recent article in the SMH surrounding a Newtown renovation where the owner had bought for $660K and had done $330K worth of work to the home over a 10-month period. They were looking to sell for around $1M, yet doing the quick math on the build the owner really needs to clear $1.05M just to break even! What surprised me even more was that there was a similar house on the next page asking similar money with a similar sale price if they were to renovate. For those who didn’t realize how much money was lost with the first story, they could buy their own and experience it for themselves.
So what does that all mean for the average investor? For those who are willing to research the market, improve in the appropriate areas and keep an eye on the budget there will always be money to be made in a renovation. But the reality for most is that buying property after a renovation has been undertaken are often grabbing a bargain when it comes to construction costs, fixtures and fittings. The market simply isn’t valuing these new assets correctly a lot of the time and these newly renovated investments often attract a much better rent and a better quality of tenant who are likely to stay far longer. That’s a deal in anyone’s books.