Should I buy an old investment property and renovate?
Buying an old property over a new property provides a range of benefits for the property investor such as a typically lower price point, more established location and higher gross yield. Old properties also tend to be more resilient in slow markets. However, the biggest advantage is the opportunity to increase the value of the property through renovating. It is this advantage alone that makes buying an old property so worthwhile!
The advantages of buying a new property such as higher tax deductions, less maintenance and generally lower vacancy rates will outstrip the benefits of buying an old property – unless you renovate and tap into the property’s investment potential.
Not only does this strategy add value to your investment it also helps you manufacture equity – giving it a significant advantage over buying a new property. Equity – the difference between the value of a property and the mortgage owed on it – is absolutely essential for helping you expand your property portfolio as equity can be used as security to purchase another investment property.
If you buy a new property, the opportunity to quickly build equity is limited. You either have to pay off the mortgage faster – a difficult undertaking – or wait for capital growth. If you buy an old property and renovate, on the other hand, you can manufacture equity by improving the property’s value in the short-term. Essentially you are fast tracking the property’s capital growth and therefore generating equity quickly.
Where do I start?
The key to this strategy is to buy a property in the right location, at the right price with the potential to add value. Whether that be a house, apartment or townhouse, the primary consideration is whether there is an opportunity to improve the property in ways that will deliver ROI. For example if there is an option to subdivide, that can present an excellent investment opportunity. Whereas renovating an old terrace in a desirable inner city suburb where prices for unrenovated property are often still extremely high, may cause you to overcapitalise.
Here are the first things to consider when buying an old property and renovating it:
- Set your budget. How much can you afford? How much can you spend without overcapitalising?
- Research the market. Understanding the property market and where to buy is absolutely critical before selecting a property. This is where engaging a buyer’s agent can be invaluable.
- Select a property. Once you’ve found an affordable property with potential, make sure you undertake building and pest inspections and consider all potential risks before purchasing.
- Plan the renovation. Plan all elements of the renovation down to the finishing touches and factor in all costs. Working with a trusted builder to project manage the renovation can ensure a more seamless and efficient process. Make sure you have council approval if needed.
- Put your emotion to the side. Don’t get swayed by emotion when selecting the property and improving it. What you like may not count for much when it comes to maximising your investment. This is where the experts such as a buyer’s agent or builder can help you put things into perspective.
Where should I buy?
This is a tricky question and the answer isn’t straightforward. One thing to keep in mind is that the best location may not be where you expect, or may be somewhere you’re not that familiar with such as interstate. This is why it’s best to consult with experts such as a buyer’s agent who can advise you on where the best investment opportunities are.
Ultimately you want to select somewhere with good capital growth prospects. There are four factors which contribute to capital growth to keep in mind. Is there limited supply and high demand? Is there an investment in infrastructure in the area? Is the economy strong in the area and is unemployment low? Who is attracted to the area? A good rule of thumb is to choose the worst house on a good street in an area with good capital growth potential.
Conduct research into renovated properties similar to the property you want to buy and what they are selling for so you can estimate the final value of your investment.
What improvements add the most value?
Every property should be assessed on a case by case basis, however, there are some common improvements you can make which typically have a high return on investment:
- Adding additional bedrooms
- Creating outdoor living spaces such as a deck or pergola
- Adding storage in bedrooms, the kitchen and the laundry
- Developing off-street parking options such as a garage
- Installing air conditioning
- Adding quality flooring such as new carpets or floorboards
- Enclosing a balcony to create an office, study or sunroom
- Creating an internal laundry
- Improving windows and doors
- Adding skirting boards or cornices
- Plastering over outdated ceiling finishes
- Replacing fixtures
Typically cosmetic changes will be more affordable yet can still add a great deal of value. Avoid structural changes which can be costly and can easily snowball, leading you to overcapitalise and sabotage your investment strategy. Engaging a builder can help you establish a renovation plan which will deliver the best value.
Feeling a little overwhelmed? We don’t blame you! Executing the strategy of buying and renovating an old property is an enormous challenge, but when done correctly it delivers enormous rewards.
The best thing you can do is consult the experts. Seek out a buyer’s agent to help you locate a property in an area with the greatest potential. Engage a builder to project manage your renovation to ensure you don’t overcapitalise, stick to your budget and add the most value.
By engaging the experts you avoid the heartbreak of overcapitalising or not maximising your investment. It also will help you avoid making decisions based on your personal opinion and preference. It’s wise to take emotion out of the mix and make logical, financial decisions throughout. Finally, engaging experts will ensure a smooth and stress free process – which is something you certainly can’t expect if you manage everything yourself!