Kayne has found a renovation property in regional Victoria. He bought it well, as you will hear, but wants to make sure he does not overcapitalize. Cherie Barber gives us the formulae.
Kevin: I want to answer a question now that came in specifically for Cherie Barber, and Cherie joins me.
Cherie: Hi, Kevin.
Kevin: It’s great to be talking to you again, Cherie.
Cherie: Thank you.
Kevin: Cherie, this comes from Kane. He says, “I’ve found a good property in regional Victoria that I want to renovate and sell for a profit. What steps can I take to ensure that I don’t over-capitalize? Could you ask Cherie for me? I paid $250,000, and well-renovated properties in the town are selling for between $325,000 and $390,000.”
So, what would your tips be to Kane, Cherie?
Cherie: Okay. Well, first of all, it’s good that he’s done his research. I say before you buy any property, make sure that you know what the value of the un-renovated house is worth. But at the same time, if you’re going to be flipping, where you’re going to be selling at the end, he needs to know what the resale property values are.
So, if he’s bought a house for $250,000, he needs to be reselling around the $340,000 mark to cover his renovation and all of his project costs, like his holding cost, resale costs, and so forth. So that’s great. It seems to me that he’s actually already in that range, which is really good.
The next thing is to make sure that he spends an appropriate amount of money for the actual renovations. On a $250,000 house, the general rule of thumb for a cosmetic renovation is that you spend 10% of the property value. So, that means his renovation budget is $25,000 – not a cent more – and that’s to completely transform that house, inside and out.
Now, I guess some of the ways, in terms of not over-capitalizing – obviously that’s a very tight budget – he might go through the house and make a list of everything that needs to be done, and he might cost that up at $40,000. So, then he needs to say to himself, “Okay, I don’t have enough money to actually do everything. What are the things that are going to add value?” So, certainly things like painting, ripping up the carpets, polishing floorboards, cosmetically updating the kitchens and bathrooms.
I guess if I can give him one big piece of advice, I always say to my students around the country, before you start any renovation, ask yourself what can truly stay in the house and what has to go. Because obviously, everything that you keep is going cost you less money to put back in.
So, things like your kitchens and bathrooms can be cosmetically refreshed through products like laminate paint, tile paint, bench-top resurfacing kits. You can buy all of these products for under $100 a tin. And this where you spend hundreds of dollars, not thousands of dollars.
Kevin: It seems to me, that as well as doing the research on the property, you also have to research all of the materials that you will be using in the renovation, because as you’ve just highlighted, you can actually very easily over-spend just on those, Cherie?
Cherie: Oh, 100%. And there are certain things… For example, I always say to my students, when you’re selecting your fixtures and fittings, really shop around. Go out and be an absolute scrooge, getting the best price on your fixtures and fittings, because $50 you save here, $100 there, it all adds up to thousands and thousands of dollars over the course of the whole renovation.
And it’s also the type of fixtures and fittings. I generally say, shiny fixtures and fittings add more value than matt or satin type fixtures and fittings. I’ll try and give you a practical example. In the bathrooms, even when I’m doing my low-budget TV renovations, I’ll always put polished tiles on the bathroom walls because they look more expensive than matt tiles.
Even things like larger tiles look more expensive than smaller tiles. They still cost you the same amount of money, on a square meter basis, but one has a perception of value, one doesn’t. There’s lot of little tricks in renovating.
Kevin: Yes, there certainly are. The other point that I wanted to raise too, and you raised it right at the start there when you were talking about Kane’s budget. It would be so easy for him to have a budget of, say, $50,000 on that reno, and then say, “Well, I paid $250,000, there’s $50,000 on top of that; that’s $300,000. If I can sell it for $350,000, I’m still going to make a profit,” but as you’ve just pointed out, that’s only just a portion of your costs.
Cherie: It is. This is where a lot of people go wrong. They think just about the actual renovation and they don’t consider their project costs. There’s stamp duty, there’s holding cost, legal fees. There are sometimes building and pest inspection fees, sometimes council fees, agents fees to resell the property. They’re called resale costs. And you should always have a contingency, and all of those costs, add up to be more than the actual renovation itself.
I call them the total cost of a project, and that’s what most people forget about and they get to the end of their project and they think they’re going to sell for X amount and they don’t. And this is where a lot of people lose money renovating or they break even.
Kevin: Tremendous talking to you, Cherie. Thank you very much. If you want to contact Cherie, or go to one of her workshops, you’ll get all the information at her website, RenovatingForProfit.com.au. One of our experts, Cherie Barber.
Cherie, thanks for your time.
Cherie: You’re welcome. Thank you, Kevin.