To Reno or not to Reno

Hi guys

Thought I would throw out my thoughts on my first buy in real estate and have them torn apart as I'm sure there are plenty of people in the same position that are considering their first big move into the world of property investing and wanted to go the safest route possible which I am lead to believe is renovating your first home and selling.
 
The Plan

Buy an ugly house that is structurally sound
Live in it for 9 months - renovate for 3 months
Sell

I'm about to invest in Dean and Elise's property systems package which should give me good insight into ensuring I do all due diligence but I just wanted to get general feedback on whether it was a good idea on trying to capitolise on that FHOG and no stamp duty incentive the government is so generously throwing out there.  It seems like a really safe way to enter into the market.  I will have 110k in capitol to throw at a 500k plus 50k in reno project to miss out on mortgage insurance.

Is this a good plan to get started with and sink my teeth into RE?

I won't be living in the property while there are major renos ie; kitchen, bathroom.

Thanks in advance for the comments,

Clint

Hey clint,

excuse my lack of capital letters as i am typing with one hand and holding my baby girl with the other.

this could be a good idea or it could not be. adding value by doing a renovation can make you a lot of money in a good market, but can lose you a lot of money in a falling market. there has been some talk about a possible market fall due to rising interest rates. see so many people bought houses when the first home buyers boost was on and interest rates were low. now that interest rates are rising there is a fear that a lot of people have over extended theirselves and will have to default on their loans and sell theu=ir house....but this is all speculation.

if you have 160k to invest with then the extra 7k of the first home buyers isn't enough to base an investment decision on. are you good at doing renovations? do you enjoy handy work? can you support the negative cash flow?

most importantly what is your goal? if you do make money what will you do with it? is financial freedom your goal? how will this bring you closer?

my investment strategy is to rent and buy cheap positive cash flow houses. eventually i will have enough cashflow to buy a house using my investments and have it cost me nothing.

Ryan McLean
http://CashFlowInvestor.com.au
Positive Cash Flow Properties Are Just A Click Away

Thanks for taking the time to reply Ryan.

The goal is to be financially free but I lack capitol that is my own to invest in positive cashflow properties - the capitol is from a money partner that is a relative.  I can't look at positive cashflow properties just yet as the capitol isn't mine to hold with.  Long term though this is what I will be aiming for.

My first goal is to continue to save and use the capitol that is available to produce more lump sum cash gains through renovations.

I don't intend to do a lot of the renovations myself - I would be inclined to focus my efforts on project management and chipping in where I can.

The general plan would be

Buy, live in home for 9 months, renovate for 3 months, sell. 

I won't live there while major renos are happening.  I will have a contingency plan that would allow me to live in the place for longer if needed.  I won't be buying until March next year.

FHOG in itself isn't a lot but when I look at the saving of stamp duty + FHOG it starts to make me think.

Overall yes I want cashflow properties but am going to do reno gigs to build up the capitol to do so.

Renovating for profit is a great way to go- If you are educated about the pitfalls.
Unfortunately, sooo many things can go wrong with a renovation, and you could find your reno budget blown out of the water in next to no time.

Do your due diligence, and maybe start small, like a unit reno or the like to begin with.
You will find a wealth of information on this forum,

good luck

Adrien

www.ecobuildingservices.com.au

Spend money on that which can be seen and admired.
Create space where there seemed to be none.
Be clever in your approach. Think measure, think measure, draw.
Then do!

Good luck.

Design & Build Consultant
http://brutalart.com.au

Thanks guys.

Adrien - I've thought about doing renos on units as from what I can tell there is so much potential in Dee Why in the Northern Beaches of Sydney.  I have lived there for 20 months and know the local demographics pretty well. 

I'm scared off by units mainly because of lack of knowledge but also because I have developed my own uninformed opinion that units have more pitfalls when renovating ie; you can only add so much value until the unit is too over priced for what the unit block is perceived as worth to the market - does that make sense?

I would love to get into unit renos and my only thought of how to give myself some kind of measurement of how to go about getting the right amount of value to add is by using Steve's A-E rating I have heard discussed previously ie; C class property in a E class street.  Would this method be ok to apply to units ie; E class unit in a C class unit block in a C class street?

I just moved out of a unit that was in desperate need of some TLC/value adding.  I was paying a very low cost to live there and the unit block was generally pretty average but I always thought to myself that this unit has to be a lot poorer than what is available in the entire unit block ie; C class unit block with an E-F class Unit.  What if I could bring the unit up to a C class - would I be adding too much value or would I be bringing the unit back to what the market would be willing to pay for a unit in that unit block.

I will pause my mind for a moment and allow for someone to comment on that thinking.  I would love to know more about whether adding value to units is a good move or if I should stick to townhouses. 

Thanks,

Clint

If you are looking to take time with our reno's then go for a house or town house.
We used to get units and usually reno'ed within 2 weeks, then straight back on the market.
As mentioned above, spend money on what can be admired, and create space where you can.
There is much more to it, but if you have time, you can do so much more, and keep control of the budget

Adrien

www.ecobuildingservices.com.au

Clint also keep in mind of holding costs.

You are looking at a loan approx 440k not including purchasing costs. (500+50-110)

Cheapest Interest rates about 6% but likely to go up.

Your interest p.a. is $27,000. For the 9 months you wish to renovate interest is $20,250 or $520 per week.

Can you afford $520 per week in after tax dollars?

In your first post you mentioned about taking the safest route. IMO I would try tackle a project which is less risky.
This is all personal preference and you may quite easily be able to service the interest repayments.

My personal preference in your situation would be to look at properties in the $330-380k range and spend approx $20k on the renovation. I would aim to complete the renovation as quick as possible and focus mainly on the cosmetics. Each additional week you are renovating the property costs you money in time/interest/potential rent lost/cash back from sale to re-turnover. If you were able to turnover 2-3 cheaper houses in 9 months your wealth would be more substantial i believe than 1x 500k property.

Let us know how you go.

Remember this is just my opinion other people will totally disagree.

Cheers,
Dave

Renovating for profit can be very lucrative. We do this successfully all the time. However it really does pay to do your numbers. Cost out your renovation in as much detail as possible before you even make an offer, look at all your purchasing, selling and holding costs and do the research to find out what the resale post reno would be. Subtract all costs from the resale figure and see how it stacks up... I personally wouldn't touch a reno that is going to produce less than $50k in clear profit for a 6 month project (3 to reno and 3 for settlement period for person that buys from you).

Wishing you every success, Ana Stankovic (RenovateAndProfit.com)
- Contributes to API mag, Handyman, Wealth Creator, PRW, Herald Sun, 4BC radio, 2UE radio, Southern FM, etc
- RENOVATE and PROFIT seminars and 1-on-1 Coaching: http://www.renovateandprofit.com/2011-Calender

hi, we are trying to start on a house i have and did a really nice job on an old inner city flat last year .
allow for some dramas like catching the flu and not being able to lift a paint brush for a week.....
the flat was easy and fast mostly done in one massive trip to ikea ( and 50 odd trips to bunnings !)
there were some hassles with the body corp gaining access to the electrical room ,and the buildings old wiring in general had to use their electricians not our friendly one and as i was tiling and needed a power point isolated while i worked around it took a couple of callouts resulting in a large surprise bill at the end.
due to the size of the flat and the new rules we ended up moving the water heater. which then sprung a leak !
no biggie but it came right out of our profits

did a one day reno seminar ,which was a shameless sales pitch for some guys share trading scam
 and during the brief talk about houses the lady said " neutral colours "
i would like to disagree
we felt that to really motivate a buyer we needed to engage them and used a strong pallette ....
six people thought it was good enough to submit offers so i rest my case
it helps a lot that my wife has a good eye
so many houses we see are bodge jobs full of stuff out of the discount pile
or not suited to the target demographic the room or the area

eg......got a nice claw foot bath for sale in south port 4215 can deliver

taking a whole year to do a  months work is a hobby not a job
calculate the tax ,holding intrest, agents  fees etc and factor it in
then go macdonalds on it
one deal wont make you rich it is the repetition of a system

good luck and remember to have fun !

Bigger , Faster , Stronger , More !

Hi ClintHarris,

I think you are doing the right thing by looking for a house to renovate. My experience is that units are easier to renovate (given the body corporate is cooperative), but as you said, the unit will always be judged by the exterior of the block. I've renovated one unit where the feedback from the agents was literally ' beautiful unit, shame about the condition of the common areas'. My first unit, which I renovated and lived in finally became a good investment when I managed to convince the other owners to renovate the entire block (rendering, painting, etc). The hassle I went through goes beyond anything I can describe here, and even though the property now looks amazing, and I sold it with a good profit, I would never do this again unless I owned the entire block. A house I renovated, on the other hand, even though it was more work due to landscaping, building a deck, etc, was a good experience, as in I had no hassle from neighbours and the DA went through in three weeks because it was complying.
What I'm trying to say here is that if you're after capital gain, go with a house, as there are too many restrictions on a unit to jump up in value quickly. 

Hi Clint,
Most importantly you need to have a plan. You need work out your costs on worst case scenario down to a light switch. As Ana said above I wouldn't touch touch a project if i stood to make less than 50,000 grand clear profit, by clear profit this includes paying your self for work you have done.
Also do your research there are so many great programs out there to help you along you way find one that works for you and your ideals.
There are ways to add equity to your home that rely lees on what the market is doing as well these are great things to look at.
You can renovate and profit if every things done right!

Winning Formulas for Success team (Renovate & Profit)
- Featured in Australian Property Investor mag, The Age, Wealth Creator mag, Handyman mag, etc
- Renovate and Profit Seminars and 1-on-1 Coaching http://www.WinningFormulasForSuccess.com

Thanks for the feedback.

There is a common theme surrounding due diligence and planning which is good to see as it has been my main focus for my education from day 1. 

I have just invested in The Complete Renovation System from Dean and Elise Parker.  I've got confidence that this product will help give me with the tools and mindset to ensure my due diligence and planning is in order before making my first purchase.

I'm going to give myself a few months studying before buying.  I just so happen to be friends with a few agents and a valuer in my area which will give me a chance to network a bit and learn more about the area I would like to invest in - attend auctions, inspect some potential prospects.....