We might renovate our home to make it a nicer place to live, but when it comes to renovating for investment purposes we need to approach the project with our heads screwed on and our eye firmly on the prize.

Gavin Taylor is a Director with Metropole Property Strategists and knows a thing or two about the subject of approaching a renovation project

PODCAST TRANSCRIPT : 

Andrew Mirams (AM): Hello and thanks for joining me today. With me is Gavin Taylor, director of Metropol Properties strategists. Thanks for joining me Gavin.

Gavin Taylor (GT): You’re welcome, a pleasure to be here.

AM: I’d like to talk to you Gavin about your line of business. Metropol does a number of different things in your business but some of the key things you do is how you value add through properties and things like that. Let’s maybe run an example. I’ve gone and bought a property or you’ve bought me a property, let’s say because you’re a buyer’s advocate, a unit in a fantastic spot but probably needs a bit of work. Tell me what you do?

GT: I think the first point to pick up is your term ‘a fantastic spot’ because if we are talking about value adding, value adding works best in the right location. You can’t go outside of the ‘fantastic spot’ as you call it, value add and expect to get great returns. The saying about making a silk purse out of a sow’s ear is really applicable to the…

AM: Yep. Great point.

GT: …value add process. Having reinforced the fact that the right location…

AM: Now, don’t everyone ring and ask us where that spot is because they change all the time.

GT: Having reinforced the point that the right location is actually very, very important, let’s talk about the number of ways we can do it. We can do it through renovations, we can do it through development and we can do it through intelligent financing, which is your field rather than my field.

AM: Absolutely. Yeah.

GT: We can do it sometimes, only sometimes, through working on the title itself. What I mean by that is, if you’ve bought a ground floor apartment, it’s got an outdoor space but that outdoor space is common property. Wouldn’t it be more valuable if you got that outdoor space a licence to be your sole use?

AM: Absolutely.

GT: Or even if you got it onto your title? That’s what I mean by value add.

AM: Wouldn’t a body corporate want to stop that sort of thing from happening or are you talking more smaller developments or smaller unit blocks, potentially?

GT: We’re talking about more of the older style blocks.

AM: Yep.

GT: What are we talking about, maybe 6, maybe 8 or maybe 12 in the building?

AM: Okay. Yep.

GT: I think, Body Corporate would be, Owners Corporations the new language I think.

AM: Okay. Yes. Owners Corp.

GT: Owners Corporation would be in favour of that because that means that it’s less of their responsibility…

AM: As maintenance goes. Yeah, of course.

GT: …goes onto the owner of the unit’s responsibility. Does the opportunity happen often? Not really. Not really but you have to be alert for those opportunities so there’s no formula when it comes to that. You just have to be aware that…

AM: That’s a great value add for something you’re probably buying anyway, isn’t it?

GT: That’s it exactly.

AM: Actually you can take and make it part of your ownership rather than a custodial or the Owners Corporation or ownership.

GT: Exactly. Let’s talk about that flat, that apartment a little further. Let’s say we’ve got the title, we’ve sorted out anything we can do by title to the best that we can do. Let’s talk about some of the other things we can do. We look at the bathroom, we look at the kitchen, we look at the carpet, we look at what’s going on there and we say to ourselves ‘is this inner condition, that we are absolutely going to maximise, getting our best tenant?’

AM: Yep.

GT: And if the answer is yes then you let it out and you get the best tenant because you’re not for the rent, we’re not doing it for the yield, you’re doing it for the capital appreciation.

AM: Yep.

GT: But every little step…

AM: That’s key for the Metropol Property Group. They’re not cash flow buyers, are you?

GT: No.

AM: I know cash flow is important but its capital growth.

GT: It’s the capital growth. You want the apartment to be in as good a condition as to get the best capital growth.

AM: Absolutely. Yep.

GT: There are apartments in the well known ring areas in great locations that don’t have good capital growth.

AM: Yeah.

GT: Let’s talk about how we can manufacture capital growth.

AM: Yep.

GT: If you look at an apartment…

AM: That’s funny, Victorias going out of manufacturing.

GT: That’s manufacturing certain things.

AM: Okay. Alright. We’re talking about manufacturing…

GT: …capital growth.

AM: That’s a great point, I just want to emphasise. We’re talking about manufacturing by taking an asset base and improving it beyond what you spend on it. Is that what talking about, manufacturing?

GT: Yes. You would take an apartment at the right time in the apartment’s life and gut it and typically, in what I’m talking about now, there’s no structural work.

AM: Yes.

GT: It’s really good cosmetics.

AM: Cosmetic renovation.

GT: It’s really good cosmetic stuff.

AM: Yeah.

GT: It’s cosmetic almost, dare I say it, down to the bone because you’re stripping out the kitchen, you’re stripping out the bathroom, you’re stripping out the carpet, and you’re repainting and are creating an absolutely pristine internal shell.

AM: Yep.

GT: In that, if you go to the right level of finishes, and I’ll talk about what the right levels of finishes are in a minute, you use neutral tones. You can then get for yourself a better class of tenant, you can get for yourself higher rent and, most importantly, you get for yourself capital appreciation, which would be maybe $1.20, maybe $1.30 for every dollar that you put into the renovation itself.

AM: Okay. That’s what you want to do. That’s the manufacturing of it.

GT: Manufacturing quickly.

AM: You’re taking that 60′s, 70′s, 80′s, not necessarily the building, but certainly that portion, that apartment and we’re turning it into a 2000, you know, the second decade of the 2000′s, and making it up to modern living standards.

GT: Appealing to more people.

AM: Yep.

GT: What you’re doing is appealing to more people; you create competition so you are then actually lifting the rent.

AM: The competition drives the rent increase and then the rent on a yield basis improves you capital value.

GT: Wouldn’t any valuer as well, knowing that you’ve just invested $40,000-$50,000 into a property, knowing that you’ve got carpets, stove tops and the like that have just done to the beginning of their economic life, wouldn’t any valuer then value it up?

AM: Going to give you higher attributable rate.

GT: Yes, exactly.

AM: For sure. Can we come back then to what you said about ‘the right finishes’? I’m interested to go there because everyone would walk into my office and say ‘I want to finance this unit and I want to finance a renovation and I’m going to spend X amount on it’. What’s the X? What’s the right amount of finishes Gavin?

GT: Well, there’s two ways of going about this. One is to take the X by a subtraction method and say to yourself ‘what is the end value going to be upon completion? What is my profit margin going to be?’ and always add your profit margin in as an expense.

AM: This is not to sell though, it’s just we’re talking about the profit as in an end valuation?

GT: It’s a notional profit, a notional profit. But you need to make sure that you factor your profit margin in there. It’s something that is not movable.

AM: Yep.

GT: Because if you start adding expenses to the detriment of your profit margin, go figure.

AM: Wouldn’t do it, yeah.

GT: Then you factor in your expenses and you say ‘that’s the maximum I can spend on this property if I’m going to get this profit margin’ and that’s kind of a feasibility analysis way of looking things.

AM: Yep.

GT: I think, it’s important in each and every case to look at it that way because it says ‘does this thing stack up?’ In terms of visuals, what are the right finishes? You can go to an extreme and put in, you know, TV (television) award winning type of finishes, the kind of McCloud Grand Designs program type of finishes.

AM: The brand new, whatever the whiz bang TV of the time and build it into the wall.

GT: You can put that sort of stuff in but you are probably not going to get the rental return on that. You put in cheap…

AM: Your tenants not going to know it’s a banging awesome versus a Samsung, is it?

GT: No. I totally agree and you can put in cheap finishes, the tenant can pick that.

AM: Absolutely, yeah.

GT: The tenant will pick that and won’t pay you premium rent for that.

AM: For sure.

GT: You have to pitch it right, you have to pitch it right. You have to put it as say, what are the invitations for a cocktail party? Elegantly casual so it’s not a tuxedo but it’s not board shorts either. It has to be pitched to the market that you’re in.

AM: You’re trying to find that middle market, aren’t you that appeal to most?

GT: Yes. Exactly right.

AM: Yeah, okay.

GT: I think, it’s also important at this stage to bring in the concept of depreciation.

AM: Yes.

GT: Now we don’t do this for tax reasons. That’s the last reason you do this for, is tax reasons, but there are tax benefits.

AM: Absolutely, yes there are and that’s both with what your throw out, which is quite interesting. You throw it out and you can scrap it or get a scraping schedule, as well as what’s gone, as well as what comes in, can’t you?

GT: Yes. Now, I’m not a tax accountant.

AM: That’s all we’ll say about that but you can.

GT: I think you’d be advised to go to your accountant and have a chat to your accountant on how best to get the depreciation benefits.