To Renovate or Not? That is the Question!

Last week we found a fabulous property for a client wanting to do a granny flat project with Property Bloom. It was fabulous for two main reasons;

- The large 950sqm block with extra wide frontage and rear lane access.
- It was renovated.

Normally, for this development strategy we would look for houses that need a cosmetic renovation.  Our definition of a cosmetic reno is internal paint and perhaps external paint (if absolutely necessary, sometimes a good gurney is all that’s needed), new carpet/floor coverings and some repairs, perhaps a little work to the front garden to increase the street appeal.  We’d be looking to spend no more than $10,000.  Often once we start our cosmetic reno we find lots of other repairs and upgrades that should or could be done and clients sometimes decided that they really do want a new bathroom or kitchen after seeing the house empty and painted. The older kitchen that looked fine before the fresh paint, now looks a little drab.  They start saying “If we do the kitchen, we may as well do the bathroom....” and so the reno budget expands. But where do you draw the line.

As project mangers our job is to keep the emotions out of it and advise our clients on what’s required to achieve a certain rent.  It all comes back to the return on investment and we don’t want to overcapitalise.

With our cosmetic renovation we can increase the rent quite dramatically in this town; usually we’d see a jump in rent of around $60-$80. 

The real benefit of finding this fully renovated house meant that not only was all the hard work done, but the risk in renovating was also removed.  Also, it wasn’t just cosmetically renovated it was fully renovated.  It had a new kitchen, new bathroom, been painted, floating timber floor boards, new carpet, new internal doors, new light fittings and ceiling fans, revived built in robes, new blinds, had been rewired and even a new solar powered hot water service had been installed.  The cost of the renovation done by the previous owners was well over $40,000. 

The big win for us was the price of this property.  The median price in this suburb is $246,000.  We paid $265,000, so just $19,000 above the median.  This property is above average due to the size of the land and its location, close to schools, shops and walk to the local club. Un-renovated this house may have sold for around $250,000 in today’s market - the previous owners purchased it years ago so they still made good money.  So in reality, for an extra $15,000 we have a fully renovated property and the ‘unknown’ was removed. 

The other major benefit was that the house is not occupied and we negotiated access to hold open houses to find a tenant during the settlement period, so the day after settlement our clients will start receiving rent without any down time due to renovations. The expected rental return on this property is $340 per week, on a purchase price of $265,000 this is already a $6.7% gross yield.


Property Bloom will add further value by building a granny flat for around $96,000 which will rent for $280 per week and our end result will be a strong 9% gross yield. Sometimes the value has already been added to properties. As long as you can purchase at the right price what’s the point of renovating yourself if the numbers stack up?  Save yourself the time and pain and move onto your next deal. 

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New, new vs old new or Smooth new developments

In my former life (pre property developer) I worked in the cosmetics industry.  One of my claims to fame was that I invented a whole new product category.  A category is a group of products that have similar characteristics. For example, when you go into the grocery store, everything is categorized in aisles; so the cereal aisle will be made up of categories such as mueslis, oat products, biscuits (eg wheat bix) etc. 

My ‘invention’ was depilatory cream for men.

Yep, you heard right.  Back then in the early 1990’s I was a young product manager looking after a women’s wax and depilatory range.  For those who may not know, a depilatory cream dissolves the hair just below the skin’s surface so you get a smoother result than shaving and it’s not as painful as waxing (ripping the hair out by the roots sometimes causing ingrown hairs). 

After some ‘in-depth’ research, I found that men were starting to focus on hair removal.  Not just on their faces but also on their chests and legs.  Some men would remove hair for sporting reasons i.e. triathletes or swimmers, apparently making them faster but others had started doing it for aesthetic reasons...apparently a bare chest accentuated their muscles (not that I noticed).

How did I research this?  Back in the old days, I would occasionally venture into the city and go to night clubs (with my now husband). OMG that was so long ago now but boy it was fun.  I would see guys, mostly gay at the time or body builders (or both) dancing around with no shirts on and with not much body hair.  As I was managing a brand of hair removal products I decided to conduct a little research (hoping I could tax deduct the exorbitant door fee!) and ask the guys how they removed their hair.  Funnily enough, they were more than happy to tell me they were shaving or waxing and not happy with the results.  I won’t go into any more detail here as this is actually a column on property developing but least to say the light bulb went on and I saw an opportunity in the market. I soon launched the first extra strength depilatory cream for men and called Andre.  If anyone has ever used this product, I’d love to hear from you!

So what has men’s hair removal have to do with property development?

Nothing really.  The point I’m trying to make is that this week I came up with a new development product to fit into our established property development category.  The new product slips in right between our existing granny flat and dual occupancy development strategies.  It’s filling a gap and I think a need in the market.

 I can’t really say we’ve invented it as perhaps others are already doing it, but we’ve taken a proven strategy; the build a granny flat strategy on existing property, to a higher level. I'm calling it the 'new, new granny' opposed to the 'old, new granny.'

With the ‘old, new granny’ strategy we are finding properties with an existing (old) house that is suitable to renovate and then building a new two bedroom granny flat on the land. This strategy has been very popular and the main benefits are:

-          It’s cost effective; about $360,000 in total costs (in the Hunter Region of NSW).

-          High gross yield of 8-9%.

-          We add value to the house through renovation.

-          Usually the property is located in established suburbs with good sales and rental history. The suburbs we choose have and charm and character.

-          It’s quick, typical timeframe about 3 months to complete.

This strategy appeals to people on a certain budget wanting cashflow.

Our ‘new, new granny’ strategy sees us build a new house and a new granny flat at the same time.

This strategy will be very popular as the main benefits are:

-          We can design the type of house we want to build.

-          Maximize rental return by adding rooms, increasing the size of house or other features in demand.

-          Higher depreciation benefits are achieved.

-          Design to fit the granny flat rather than have to work with position of existing house.

-          Appeal to higher income tenants looking to rent new property and achieve higher rent.

-          Building warranty included for both new dwellings.

-          Total cost around $520,000

-          Possible higher capital growth prospects

The difference is a lower yield for the ‘new, new’ strategy of about 7.5%, but depreciation is higher so most likely a cash flow positive result for the investor (depending on their taxable income).  This strategy suits someone wanting more depreciation and possibly higher capital growth potential as we’ll be building these in up market land estates.

So, it was fun running the figures and seeing just where this new development strategy would fit into the Property Bloom range of developments we offer.  We now have a firm build estimate, some great land lots lined up and are ready to launch our new product...I knew my marketing background would come in handy one day!

Investing in property through a self-managed super fund a good bet to retire comfortably

“Hey Jeff, just wanted to let you know that I’ve transferred some money into my super account, can you tell me the best place to invest it right now within the fund?”  This was a question I asked of my financial planner yesterday.  It was that time of year when I had to make the obligatory transfer of money into my managed super account to meet requirements as an employer (to myself).  Each year I struggle with this: transferring cash into my super then watching it disappear into the deep, dark hole of the managed super fund then opening my bi-yearly statement to see it has disintegrated!

Jeff said, “Well, Australian equities are good buying right now (translation: because the market is so crap), so we’ll just put it in there.” So that’s what we did, dumped some money into shares, and I will now await my statement to see how that investment performs.

My next question for Jeff was, “How far out of retirement should we start moving money out of the more risky areas and into the safe havens or defensive stocks?” While I’m not at that age yet, I don’t want to end up like a lot of retirees at the moment who have lost buckets of their retirement funds in the poorly performing share market because they were caught out with the impact the GFC had on their super.  They’ve been forced back to work or to rely on the government pension. Jeff recommended that we should look at transferring into the safer areas, such as cash about 10 years before you are looking to retire.  Wow, so for 10 years we have to cop a low return on our money just to play it safe?  The alternative is to run the risk or losing a fair chunk of it.

Gosh, a lot can happen in 10 years in property, I thought.

Reading my mind, Jeff said, “Jo, with your experience in property, why don’t you set up a self-managed super fund and then you can just invest in property?”

He thought that to be a really good bet.  The fact that I’m already holding a substantial amount of property didn’t seem to faze him, but I always thought it best to diversify.

So I thought this an interesting topic to ponder on today: just how much property do we need to retire comfortably? I picked up my favourite property magazine and saw on the cover the headline “Retire Richer and Sooner” – OK, what have they got to say?

The headline story was titled “Get Rich from Regional Australia”.  Of the nine regional towns they highlighted as having the best capital growth potential, two were from the Hunter region of NSW.  Property Bloom tracks the long-term growth of suburbs we develop in. I pulled up my graph on a particular town that I just had Residex update for me.  I track the quarterly median value and the volume of sales in this postcode. There was a very nice upward trend with varying degrees of peaks since March 1996 when I started the tracking. I personally bought into this particular town in 2001. Looking back over the past 10 years I saw the median price was $114,500 in March 2002 and in March 2012 it was $250,268. It had grown 119% in this 10-year period.

That 119% says it all, really.  I know where I’m putting my retirement funds.

My retirement strategy is to buy and hold but with one very important twist and that is to add value.  The property I purchased in 2001 in this town has increased by 119%, but I also renovated and developed the land, adding more dwellings, so the yield on this property is also very high.

Property Bloom is always looking at development strategies that will add value, increase yield and create equity. We have one very new strategy that we are adding to our portfolio now that will mean clients make an 8% yield on an affordable investment. It will also give good depreciation for those still working.  The NSW government is also helping us with this strategy by throwing in $5,000, as it sees the need to boost housing in this state.  If you’d like to hear more about this growth strategy then let me know, I’ll be covering it in more detail on Property Observer soon. It just might be what you need to boost your retirement fund.

When Time Is On Your Side

In the last few weeks I completed a dual occupancy project in Muswellbrook, a town in the Hunter Region of NSW.  This project took two years from the time that I found the land to the time that we had both four bedroom houses tenanted at a record high of $500 per week. Sounds like a long time for a dual occ...but time was on our side.

We were able to buy into a subdivision in a prestigious estate before the land was registered. This is not a game for everyone as often registration can get pushed out and in this case that’s exactly what happened but patience prevailed. 

It didn’t matter about the delay, we were literally buying land off the plan and in the time that my client exchanged contracts (on a minimum deposit as negotiated as one of our terms) to the time that he settled on the land, it had increased in value by about $30k.  This is unusual but we had been able to buy in early, get a great deal and get the pick of the sites in this release. 

Property Bloom negotiated an awesome price of just $142,000 for a 1066sqm block of land which represented a 15% discount off the original asking price. What’s more, this land developer ended up naming the street after me.  That was totally unexpected and I was honoured.  Perhaps now this street will see more strong growth because of its name!

So, whilst we were waiting for the land to register, we didn’t sit around twiddling our thumbs, we were busy producing a concept plan, I wanted two large four bedroom houses as my research had told me that was what the mainstream market was looking for. It meant we’d appeal to both families and contract companies who looked for houses they could put 3-4 men into whist seeing out their contract, usually to the mines. 

Property Bloom commissioned two builders to tender on the project. As we got closer to registration and the civil works were completed in this part of the estate, which means the infrastructure such as roads, guttering and footpaths were built and the lots were finished being sculpted, then we ordered our detailed or contour survey.   This is required before you can finalise plans.  We were well into the design phase by now.  As registration approached, the DA plans were completed, a builder engaged and we had out ducks lined up, ready to lodge the DA with council as soon as the registration took place.

Council approval took just five weeks and we had our Construction Certificate plans finalised and lodged within another few weeks. Before we knew it we were under construction.  But was this good timing?  As we started building it just happened to be at the time NSW saw one of its wettest years in history!  Our builder rallied, completing the project well within the 26 week contract period and we had Christmas during this time.

So the longest waiting period was the time between securing the land on a low deposit which meant holding costs were minimal yet capital growth took place on the land.

As we neared building completion, we interviewed agents and negotiated a discounted management fee for our client, appointed the agent, discussed what we wanted to achieve and then stood back while they did what they do best which was to achieve a record high rent for us. It’s important you mange this part of your development closely as the one time you have to attract the highest rent is when your properties are brand new.  Property Bloom was able to save our client thousands of dollars by negotiating the terms of management.

Here are the high level results of this development in a nutshell:

·         Equity created:  $158,000

·         Gross Yield:  8.3%

·         Depreciation in Year 1:  $22,242

This is an awesome example of a successful development as several factors came into play. 

On first impressions a project may seem to take too long but when you drill down to the detail it’s often not until you finalise the timeline of a project and reflect on what happened over the entire project that you can see the real results.  In this case, time really was on our side as the price for land increased during the registration period and this combined with a speedy approval and build phase and a strengthening rental market meant our client benefited in more ways than one.