Renovating investment properties
This article is not intended to be financial advice – you should not rely on this as being financial advice, we accept no responsibility for people who rely on anything I write in this article. Everyone’s personal circumstances are different and you should get independent, professional financial advice before making any financial or investment decisions.
The Brisbane property market has changed quite a bit in the post-GFC years; perhaps most noticeably in the area of investment properties. As a Brisbane architect, I have seen quite a shift in the way smart investors are approaching the current property market and in particular, their approach to renovating investment properties.
Fix & Flick in the good old days
Back at the start of the century – some 13 years ago now – investors would find an average house with good bones in a desirable street and then buy it, renovate it or extend it and sell it. This ‘fix up and flick’ approach certainly made a lot of people a lot of money back when the Brisbane property market was booming.
But since the world’s finances took a dive back in 2008, the local property market has slowed down and investors have found that a new approach is needed.
Rentals in the good old days
Back when the market was booming there were still large numbers of investors who would purchase properties and keep them for the rental returns. The rental market was strong but not spectacular, but there was money to be made providing you kept your costs to a minimum. To keep costs down investors would spend as little as possible on these properties and do whatever work they could themselves.
And whilst this was effective in maximising the income they received from rent, the properties themselves had not experienced as much capital growth as they might have if the owner had renovated them. However, it has to be kept in mind that in a booming property market builders were busy and charging top dollar, so too were suppliers, making renovating a potentially costly exercise. Those who did little before renting their houses out certainly did take the right approach in terms of maximising their profits back then.
The modern investment strategy
But many would argue that what worked back then doesn’t work now that the market has slowed. A different approach is needed.
The modern investment strategy still involves buying an average house in a great street, however now instead of fixing it up and putting it straight back on the market, investors are renovating it and renting it out.
Now you might be wondering why they are bothering to renovate if they are simply going to put tenants in. Well having asked the same question myself, this is the answer I received and it’s one that I personally agree with.
Lower building cost and cheaper materials
The investors that I have spoken to have quite rightly pointed out that it is probably cheaper to renovate now than it will be in 3 to 5 years time. And the advantage of renovating now is that it costs less, but increases the value of the property over the time that you own it.
In addition to this, a well-renovated home quite often brings greater rental returns, but it is the capital growth advantage that appeals to the modern investor.
For example, imagine you buy a home that has four bedrooms and a small fifth bedroom/study. It also has a bathroom and a small, pokey ensuite. Now seven or eight years ago you would buy this property, gut the fifth bedroom/office and turn it into a walk-in robe and spacious ensuite before selling it.
Well, the same applies now only you are renovating and then renting the property out with a view to selling at some point in the future.
The time to do it is NOW
Whilst investors may be tempted to wait and renovate in the future when the market picks up, the reality is that by then the cost of materials and labour will be significantly more than it is right now. The lower cost of building now due to the number of builders looking for work, plus the potential to gain a higher rental return over time, makes it more appealing to renovate now before renting it out.
At worst you may need to give the property a coat of paint to cover up the wear and tear from tenants, but that is a minor expense compared to what it may cost to renovate in five or ten years time.
So like I mentioned earlier, I am not giving financial advice, simply passing on a strategy that makes a lot of sense to me given the current state of the market. If you would like to discuss renovating an investment property simply give us a call at dion seminara architecture (07 3899 9450).