Renovating
Renovating is a way of adding value to a property in a stagnant or low growth market within the property cycle. It is the next step up from a "Buy and Hold" strategy, and allows you to have some control over your investment. Some renovations can be quite simple, like adding a wall to create a third bedroom, or quite complex by building an extension to add a third bedroom. What has to be considered is the cost of the renovation compared to the expected increased value of the property. In general, to make the project worth the effort, the new value of the property should be twice the cost of the renovation. For example, if the renovation cost is $20,000 then the property should be worth $40,000 more.
In most cases we can either have the property revalued and borrow the extra cash to put towards the next project, or we can sell the property. These strategies both have some advantages and disadvantages depending on what the next project might be and the intended final result. We need to look at our long term goals and our short term goals. In retirement we may require a net rental income of $1000 per week, or we may be aiming for $1,000,000 in cash. In the short term we may be eager to start another renovation. If we decide to sell the property we get our initial investment back plus the profit. We then have to consider how long it might take to sell the property and how much the holding costs are. We would also have to pay capital gains tax and a real estate agent commission on the sale. We also lose the potential for increased capital growth because we no longer own the property. If we refinance with the bank by revaluing the property we can rent the property at a higher rent than before, therefore increasing our cash flow, and we still get our original investment back (and maybe part of the profit) even though it is borrowed money. There are very few costs involved, a minimum of time is lost finding a new tenant, and there is still an opportunity for capital growth. Either decision is correct depending on your own circumstances and your current goals.
Depending on how we access this profit influences the decisions about the renovation itself. If we are renovating to sell it we may choose better quality tiles and tapware, maybe fancier lighting, even central heating and cooling. By spending a bit more it will make it more appealing to the purchaser and reduce the time on the market. It is important when making these decisions that we research the market and understand what the market is saying. Outdoor areas are popular at the moment, so if this fits within the budget create an outdoor space and your property will have extra appeal. Water is an important issue so its no use creating a garden if it can't survive, or large areas of lawn that can no longer be watered.
We also make decisions based on our current emotional state. We can't always be in a upbeat, positive frame of mind and we can't always think like our tenant or potential buyer. We need to keep in mind our research and our plan, and be willing, and able to change it, when the market changes. We need to make sure that if Plan A doesn't seem to be working we have a plan B. This may be as simple as having available funds to ride out the situation.
Economical, social and emotional influences have an affect on all our decisions. By being aware of these influences we are able to make the decisions that are right for us at the time.
Ken Greene