Moving forward while going sideways
Just because the property market is flat does not mean you can’t be adding to your wealth, as real estate author Patrick Bright explains
OK, so there’s a flat market where you own a property or two. You want to invest in another property, but feel as if you’re waiting on the sidelines until you can save up another deposit or the capital value of your current property portfolio increases enough to leverage off and borrow against. So what can you do? Well, you can roll up your sleaves and get on with adding value to what you already own.
I love what I call “manufacturing capital growth” through renovating. If you’re smart about it then you not only raise the asset value of your property but you also increase your rental return and cash flow as well. You can then draw down on that equity and add to your property portfolio when ready. This approach allows investors to build their portfolios more quickly than they could if they relied solely on a rising market to increase their portfolio’s value. It’s a great strategy that you can implement at anytime but it works particularly well in a flat market.
The reality is that some people will renovate well and add significant value while others won’t, with many overcapitalising and losing any advantage they stood to gain. So if you want to go down the renovation track, here are a few things to consider.
Select a good property
If you haven’t purchased one as yet, the first step in looking for a property that would benefit from a renovation is to make sure it meets the criteria of a good investment property. In short, it should be near an employment hub, close to entertainment facilities, have easy access to public transport, have some unique or highly desirable features about it and be in limited supply to ensure there’ll be a steady stream of quality tenants to choose from. It will also make it easier to add value if you have a well designed floor plan to work with or improve upon.
Look for old bathrooms and kitchens that need to be brought up to date. Maybe a wall could be brought down between the kitchen and lounge room in order to open up the space and make the most of any views. If the property doesn’t have internal laundry facilities then consider adding a washer/dryer into a cupboard in the kitchen or bathroom. Look for opportunities to add off-street parking to properties that only have street parking – this is particularly appealing in high-density areas where parking is limited.
Consistency is important when undertaking these projects. There’s little point adding a modern kitchen if the bathrooms are dated as it will just make the older facilities stand out a mile. Similarly, don’t overlook the small things. New light switches, power points, door handles and taps are all important. Sometimes it can be the little things that bring a room down. Instead of appreciating the large open spaces and slick appliances your eye is drawn to the unattractive finishes.
Don’t lose sight of the big picture
Renovation projects are always challenging and take time. Everyone knows a friend or relative who has been renovating for years with no end in sight. When renovating your own home you can choose to be flexible with the renovation time and do it over months or even years.
However when it comes to renovating an investment property you don’t have that luxury as the longer it takes the more of your time and cash you burn up. Just think about it, an eight week renovation will cost you at least eight-weeks in lost rental income and if the project isn’t managed carefully that loss can increase very quickly.
In addition, if you choose to do any of the work or project manage the work yourself then you should add up how much it will cost you in lost income if you’re taking time away from your paid work. If you don’t have the time and experience then consider hiring an expert in this area to manage the project on your behalf.