Renovations – a problem for homeowners and renters who face rising housing costs and property investors try to convert cash-flow negative investments into performing rentals.
Renovation for Cash-Flow
What are the Considerations and Options?
Renovation or not— better performance or not?
Most people talk differently about investment and owner-occupied properties. But when looking at the dated national housing stock, homeowners and renters facing the same problems — how to manage rising housing costs while living well below within their means.
Like me homeowners renovate to improve the comfort of their homes but investors do to attract a different kind of tenant and improve equity (and LVR) for refinancing investments.
From cash-flow point of view, if renters found the right rental home in desired conditions, preferred location, close to city and work, good transport and schools and recreational facilities, they are willing to spend more on housing if they can save in return on expenses for transport, energy consumption and recreation.
Investors who can improve their cash-flow (serviceability) develop their business — saying; long-term thinking makes a huge difference when it comes to performance of investment properties.
In contrast dated or rundown housing does not meet people’s expectations and under-performs as investment apart from other (social) problems landlords have to deal with. I have seen so many dated (substandard) houses in original outfit from the days they were built.
Renovating or tearing down
As homeowner you can live in and renovate a house step-by-step over a long period of time.
Under same conditions a investor deals with a vacant property, holding and renovation costs. The timing is crucial, because home improvements are not rent-deductible and have to be capitalized. That is why for houses with structural damage a decision needs to be done based on numbers. Depending on property values in that region I would go for demolition and re-build by pre-manufactured house design.
Realistic value compared with costs
Market values are freely accessible, but often I found them misleading to assess renovations and rebuilds, which are based on “rebuild or replacement” values. You might look at market values when buying or selling, but improving the performance of an investment requires different measurements.
The differentiating factor of replacement values is how well are houses equipped and what will the rebuild costs be for a desired level of quality and comfort. Same aged and sized homes can have central heating or no heating at all, retrofit double glazed windows or draughty originals, and so on. The technical details and the state of maintenance or repair will answer that question – worth renovating or not.
If you decide to build new, modern, bigger – you also will consider planning stages with the architect, council’s compliance costs and time frames to obtain councils permissions.
Two examples before and after the renovation
Example 1 —Photo at the top: Opening a house for light and space
The house had good bones, no structural damage, but was dated, dark and rooms like boxes with limited space. To limit the compliance costs and time frames (holding costs) the project was designed as “Minor Alteration”.
At completion, the house felt bigger by opening the light-flow through the house, and fixing all problems (insulation, heating, new flooring, modern appliances) made the house attractive for renters. Scaling down the project to a “Minor Alteration” reduced compliance and renovation cost by nearly 50%.
Example 2 —Photo below: Converting a bad performing rental
Wasted land is another reason that rentals perform badly. Yes, tenants like a backyard for kids and play but fail when it comes to keep a section weed free and gardening. In this example we cleared the land, built a multi-purpose garage/workshop with rumpus room, fenced the entire section and—people love it.
A large deck links both buildings usable as play (entertaining) area in all seasons. The new-build is double glazed and the potential—I leave it to your imagination.
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Klauster Blogs lead to a real person, IT professional, investor, landlord and business owner with interests in technologies, properties and trading.
His passion, making experiences available and helping people like you, comes from extensive travelling and the principles of life—how to avoid pitfalls in unfamiliar territory when investing or forming relationships.
The philosophy to treat life, partnerships and hobbies as an investment has helped people in his circle. Life is a dream with a deadline, happiness comes from making the right choices and having realistic expectations.
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Budget friendly way to convert a cash-flow negative property
People are willing to pay for comfort regardless of owning or renting a home. Good earning renters desire rentals which are modern, contemporary and with an internal and external layout for enjoying life. That is why transforming a dated bungalow into a home that meets people’s needs works in all markets.
Dealing with planning and council regulations (red tape) prolongs the time for completion and could escalate holding costs. That is why planning within rules and regulations becomes so important and is essential to save you money. I consult the council, architect and builder before I start looking at solutions.
Looking at the numbers:
If you borrow 10k by 6% you would pay on interests 600 Dollars a year. If you get after renovation 40 Dollars more rent per week that would result in $2080 minus $600—in total 1480 Dollars cash-flow with zero Dollar out of your pocket.
Planning budget and estimating costs
We always work out two solutions, valuate expected expenses and choose a budget with 20% held as reserve. Running out of money shortly before completion would be a disaster. Unwanted surprises especially when renovating are common problems to deal with.
Budget blow-outs are common when the estimates or builder’s quotes have been designed to beat competition and for obtaining the job. Also engaging somebody, who is not trustworthy, skilled or does not know council’s rules is a risk to be managed well.
When reading about disputes, most complaints are made under the assumption that the job becomes too expensive, takes too long, or is sub-standard and poor quality. For these reasons alone it is important to get detailed quotes from builders and trades people when doing your sums to ensure you can adequately compare quotes.
Finances, insurance and the unknown
Consulting the lender before starting a project (getting finance and upgrading the LVR) is quite important. Be aware of the clauses not to breach the loan agreement and risk the loan could be called up.
House insurance is another crucial part as you signed a disclosure agreement. Breaching the terms and conditions on the insurance policy has fatal consequences. For instance to disclose when your investment property becomes longer as 6 weeks vacant (on my policy). Check your insurance policy.
And finally your liability cover; your building place makes you vulnerable for legal claims and work place injuries. Hope this information gives you a picture - if not, please comment.