This week we are joined again by Gavin Taylor is a Director with Metropole Property Strategists for the second part of our discussion about how to maximise the benefit of renovating an investment property without over capitalising.

PODCAST TRANSCRIPT : 

AM: Max out your benefits. Okay, can you tell me is there a guide percentage that you would maybe, and again this is not necessarily fixed, but a guide percentage? If I bought a $500,000 unit in a nice spot in Melbourne, is there a rule that’s it’s about 10%? Is it 5%? Is it 15% or 20%? We can always talk about over capitalising where you’re spending money and you’re not getting the return on it.

GT: Yes there is a danger of over capitalising and over capitalising generally comes from emotional renovations.

AM: Yes.

GT: Now I have probably over capitalised my own home and I don’t mind doing that, in the sense that, I’m going to get pleasure out of that. I’m going to have a slightly better bath, a slightly better this and a lightly better that because I’m living in that space and I’m enjoying being in there.

However, to over capitalise and investment is to go backwards and what our experience indicates is that it’s probably about right. Your figure of 10% is probably about the number that you look at. If you’re buying something about $550,000 you’re probably looking at about $50,000 in renovation.

Having said that though, one bedders (bedroom) are a bit more challenging because for the two bedders or three bedders, you’re stripping out the kitchen, you’re stripping out the bathroom and the bathroom and the kitchen for a two bedder, the bathroom and kitchen for a one bedder are not that much different in size. So, there is a higher level of caution that you have to pay to renovating in a one bedder because it’s capital cost is substantially lower than a two bedder but you might need to do roughly the same work.

AM: There you go. If you’ve got that one bedder in the wrong location and you spend 10% you’ve probably over capitalised from day one and gone backwards, haven’t you?

GT: Yes.

AM: There’s a whole range of factors, it’s not just ‘we should go and buy and spend 10% and we’ll have manufactured growth straight away.’ I think, that’s important people. We just understand that whilst we’re using some numbers, there’s not a hard and fast rule, is there? These are guides.

GT: Our guides at Metropol are, our guides are it has to be in the right place and start it off. Then renovating is probably 10% of the capital purchase and we do an assessment prior to getting into the renovation of what the post-rental and the pre-rental value and capital values.

AM: Yeah. Sure.

GT: We actually work out the feasibility and we don’t do structural work.

AM: You’re looking at your end yield, which obviously adds to your end capital growth and that profit that you talk about earlier.

GT: Yeah, your notional profit. All of this is driven by due diligence and one of the things we need to be due diligent about is owners corporations. And one of the demands, and increasingly taken for granted almost these days, is an air conditioning unit in an apartment. Where do you put the compressor? Where do you put that funny ugly unit with a great big fan in it?

AM: It doesn’t make your apartment look any prettier, does it?

GT: It doesn’t.

AM: But it’s very functional and very important on hot summers day or a cold winter’s night.

GT: It is absolutely necessary if you want to be cool inside. Do you put it on the balcony? Do you put it outside? Do you hang it off the end of building? An owner’s corporation might have a say in that.

AM: Yeah, absolutely.

GT: Make sure you’ve got those angles covered before you go and do whatever you do.

AM: Fantastic.

GT: If you’re putting it on title, that’s fine. If you’re putting it on common property, get permission.

AM: Okay. I think, there are some brilliant tips in there Gavin. Just give those last couple. We want to buy in the right spot, and then you want to make sure we’re renovating for the middle market or appeal to most and I think the most important thing you said that I think a lot of people get wrong is a feasibility or due diligence.

GT: Absolutely, absolutely, because you can’t, especially in a renovation where you’ve got have a little bit of a contingency just in case, you can’t repair things that are surprising. You actually have to respond to them and you really have…

AM: You just don’t know what you don’t know, do you?

GT: You don’t know what you don’t know. The advantage of doing a renovation for a first timer is that if you do make a mistake the damage is not earth shattering. You lose some dollars but…

AM: But that can be recovered.

GT: But that can be recovered.

AM: Over time.

GT: And if you bought in the right place, time will be your friend.

AM: Absolutely. Alright, I think, that’s some fantastic tips. Thanks for joining me today Gavin.

GT: You’re welcome, pleasure.

AM: See you soon.