Renovate and Hold to Profit 3 Ways
Did you know that when you renovate an investment property to hold, you profit 3 ways?
- The first is the manufactured ‘renovation equity’ you create by doing the renovation itself. Your aim is to lift the value of the home in 6 weeks or less by at least double your renovation budget. As a result, your bank valuer look at your property more favourably and lift it’s official value, enabling you to redraw on that equity that you’ve created in order to buy again and build your portfolio.
- As a result of your renovation you’ll be able to attract potential tenants with deeper pockets and earn top rental dollar post-renovation. The difference between your pre-renovation rent and post-renovation rent is called your ‘rental equity’. Remember you’ll benefit from this over the entire time you own the property.
- The final way that you profit is your ‘capital gain’. By holding your property over the long term, you’ll increase your profit as your property grows in value in line with market increases over time.
RENOVATION EQUITY + RENTAL EQUITY + CAPTIAL GAIN = PROFIT x 3
And that’s just what happened when I met Lisa and her brother Nick in 2013 when they were looking to revamp a Cape Cod style investment property they’d purchased in Newcastle, NSW. They had recently renovated the interior of their property, but called for my help to tackle the complete exterior of their home and garden. With money tight, a stack of work to be done, I helped them add street appeal to the property in just 5 days.
SCOPE OF WORKS
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- Refresh dwelling externally with a new paint colour scheme
- Addition of Cape Cod ‘heritage inspired’ elements – timber fretwork, window transfers
- Addition of a new rear deck to ensure seamless indoor / outdoor transition, while serving as a practical entertaining space
- Mass reduction of overgrown landscaping and unusable backyard making it a practical, useable space that is visually striking
- Addition of a new, defined driveway – replacing existing driveway made of irregular pavers
- Cosmetic camouflage of the existing fences for improved appearance
- Cosmetic refresh of the existing garage
- Addition of new garden beds where appropriate
Not only did our plan work in the short term, increasing the value of the property by $25K in just five days (after reno costs), but the rent also increased from $350 per week to $430 per week, giving Lisa and Nick that rental equity they were after.
But here’s where it gets really interesting. Lisa and Nick took my advice and held the property. They’ve benefited from increased rent and steady tenancy and the rent today is $470 (a further increase!). In just 5 years, they’ve also passively earned another $364K with the property now valued at a whopping $839K!
SCROLL DOWN FOR FINANCIAL BREAKDOWN
FINANCIAL BREAKDOWN 2013
Property Value Pre Renovation: $440,000
Renovation Spend: $10,000
Renovation Time frame: 5 Days
Property Break Even Point: $450,000
Property Value Post Renovation: $475,000
Profit Margin (After Reno Costs): $25,000
Rent Pre Renovation: $350 p/w
Rent Post Renovation: $430 p/w
Rental Increase Post Renovation: $80 p/w
FINANCIAL BREAKDOWN 2018
Rent Uplift since purchase: $120 p/w
Property Value now: $839,000
Capital Gain over 5 years: $364,000
This is such a great example of investors who took advantage of all 3 types of profit from their Renovating For Profit project. It’s why I always say to hold your Renovating For Profit properties for the long term to take advantage of compound capital growth, if you can afford to do so.
