INVESTING INSIGHTS WITH RIGHT PROPERTY GROUP: Mastering the fine art of manufacturing equity

The art of manufacturing equity through property renovation isn’t always easy, but the rewards for a job well done are endless for an investor’s portfolio.

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In this episode of Investing Insights, Steve Waters and Victor Kumar from Right Property Group partner with Phil Tarrant to explain how investors can avoid overpaying for property and skilfully identify opportunities within assets to successfully master this art and get the best bang for their buck.

Tune in now to hear all of this and much, much more in this episode of Investing Insights!

Suburbs mentioned in this episode:

Cambridge Park

Previous episodes of Investing Insights:

Do you have a plan? Advisers’ tips on future-proofing your investment portfolio
Don’t ask, don’t get: advisors’ tips and tricks to property negotiation 

Full transcript

Phil: G’day everyone, it's Phil Tarrant here. How you going? Thanks for joining us for our next instalment of Investing Insights with the Right Property Group. For those of you who are new to this particular episode, or if you haven't found Investing Insights with the Right Property Group beforehand, we try and sort of dig deep in some of the issues, which are really impacting property investors. So, if you found this from The Smart Property Investment Show, you know I like to share stories with investors about how they go about investing in property. What this particular podcast is about is that I've asked my buyer’s agents and good friends at Smart Property Investment, the guys from Right Property Group, to come and actually dig deep in some of the strategies around property investment. We'll look at some of the often-complicated terms that you might hear, but also try and simplify property investment so that we can make it not a scary factor that might inhibit you from investing in property, but make it something that should be able to empower you to go about and create wealth through property.

So, I've got our regular guest hosts in the studio: Steve Waters and Victor Kumar – how you going guys?

Steve: Good thanks.

Victor: Good, how are you?

Phil: Good, so as I mentioned I like a lot of storytelling around property investment and everyone's story's a little bit different. I think you guys as professionals that work as buyer's agents for investors probably hear every single story known to man. Everyone's very different. I think that's what a lot of people often forget when they listen to podcasts like this that everyone's circumstances are very different so you need to make sure that your property investment strategy is right for you. What I want to do today is something, which really resonated with me Steve, when we first met all those years ago you used the term, probably for my first many round manufacturing equity and I've sort of got to thinking about that and a lot that you do manufacturing is you're making stuff and equity being something, which your property investments.

You don't want negative equity.

Steve: No not at all.

Phil: Positive equity. So I want to do a podcast around the art of manufacturing equity. So, to me this means essentially either manufacturing equity through purchasing well – so you don't need to do anything whatsoever – or purchasing an asset that you can spend money on and amplify that money so you can turn a dollar into X dollars in capital value. So, that's the focus for today, you guys happy to touch on that?

Steve: Let's do it.

Victor: I don't know if that's your term or something that's been bantered around so much -

Steve: No, no we made it up.

Phil: It's not my term it's a manufacture -

Steve: No, no it's my term.

Victor: It's your term.

Phil: You take stake today. So, let's just deal with the definition, what is manufacturing equity for our listeners?

Steve: Spending a dollar to make a dollar – so taking something that perhaps is a little cosmetically challenged and we tend to steal away from structural renovations because it costs a lot more, there's a lot more inherent danger or risk so to speak. So, cosmetic renovations are something that you can spend a little make a lot. But you've really gotta have the combination of making an under market value as well and knowing what the purpose of the dollars that you're gonna spend. What's the result gonna be for you, whether it be cash flow or equity.

Phil: Okay, so let's talk about that process then, identifying under market value property and then securing that property for that price. So, if the market says $400,000 for a property and you might find something which is at the $350,000 range, which is hard to find and the skill of a buyer's agent – you typically sniff out those deals. But it actually might be a $350,000 property because the state that it's in today is what the market says is $350,000. Now, we can talk about some of my experience in the stuff that you've bought from me later, but that could actually be a $400,000 property or $450,000 property should you spend a few bucks to bring it to the standard to other properties in the area, which get the sort of -

Steve: Yeah, and the really important point here is actually identifying what market value is like you say, just because it might be really badly cosmetically challenged and we're buying it for $350,000 but that's probably what it's worth, even though it's potentially under market value by spending the dollars to it. Because remember at the end of the day, it's worth what someone will pay for it. It's whether you can actually see the what's and work with the what's on the property and perhaps take advantage of a situation better and cheaper than anybody else. But that's all part of your diligence, that's all part of your research. A lot of people get unstuck with renovations because they think they can do it in a specified timeframe, they think they can do it for a certain budget, and they think that an end product will be worth X when sometimes they get the trifecta of being wrong. We've seen the results of that quite often even today.

Victor: Yeah, I think Steve, when you're talking about renovations often what happens is that people go to these seminars and depending on how many seminars they are on in terms of renovations, depending on the phase of the market and all of those sort of stuff – a lot of people do get caught up in this and they end up actually paying a lot more than an actually okay property (so an already renovated property), they see something which has been advertised as handyman special or a renovation potential and they end up paying far more than what it would have been fixed up.

Steve: And that's part of every cycle, we talked about this last cycle as well where we used to joke around saying we might as well just trash our properties and put them on the market because they seem to be getting more dollars than what a good conditioned property is and as Vic says, there's so many courses out there now that advocate and teach you how to be a renovator and a lot of them are really good courses but there's no secrets to it. It's just really, the trick to renovation is the costing and knowing what to do.

Victor: And buying well to begin with.

Steve: And buying well, it all starts with that.

Phil: It comes out of buying well and we'll touch on how to maximise renovation potential by doing this cost effective. I just want to drill down on this concept of “under market value” and I talk a lot about it, you guys do as well and most people banter the term around at some point. It's the investor holy grail to buy something for less than what it's worth, right? But let's talk about that so, what you pay for something is what it is worth. The market has dictated that, that property is worth X. Now, you might be able to see as a professional buyer's agent or myself as someone who does a lot of investing, actually I can actually create something out of this. It's got a, the blank canvas is okay, I can create something out of this to manufacture that to a point where it can be worth a lot more. But it is what it is. And I'll use an example there's a property that you guys negotiated for us, must be sort of four, five years ago that place out at Cambridge Park.

Steve: Yeah, good example.

Phil: We paid $235,000 for it, it was a four-bedroom property at Cambridge Park, which is near Penrith and we got it at auction for $235,000. That's what the property was worth, right? It was actually worth less than that when you consider it because the bank said, hang on a second, the property is so bad that we're not gonna give you, we're gonna lend you on the value of the land rights.

Steve: Because it was uninhabitable.

Phil: Because it was uninhabitable, that's how bad it was, right?

Steve: Correct.

Phil: We renovated that property, we lifted its capital growth by about a hundred plus grand, I can't remember exactly but it's all in one's property investment. That today is a $600,00-ish grand property.

Steve: Yeah, $650,000. Yeah, and that's only in the space of five years. But interestingly enough with that very same property if you had not have touched it, we bought it for $230k, if you had not have touched it, it's still probably worth $450k today – just purely because of the market growth. So what the renovation has done is it just promoted its value.

Phil: Yeah, it just amplified what it could be.

Steve: Correct.

Victor: Rather than crappiest house on the street that is in Cambridge Park, it's not the best one, but it's sort of somewhere in the middle to probably 60 percentage range.

Steve: So it's given you equity but it's also given you really good cash flow as well.

Victor: Great equity, great cash flow. So, that property was under market value but it was actually worth what it was worth.

Phil: Yeah, on that day.

Victor: On that day, so we were able to see the upsides in that property and this is the trick in terms of the art of manufacturing equity.

Steve: That's the key is being able to identify that upside. And the upside is not always about equity as we mentioned before it might be the cash flow or in a perfect world you want the combination of growth and also equity and cash flow. You need to identify where to spend the money. What areas of the property do you need to put the most dollars in to get the best return on that dollar.

Phil: So, let's deal with those two concepts Victor, so equity so, growth in the capital value of it and then also yield all the cash flow. So, under market value property okay let's look to manufacture equity through renovation, we'll deal with that in a second in terms of how you go about doing that. But the purpose of manufacturing equity is to try and make the property be worth more, but also allow you to rent it out to more to help cover the cost of holding that place.

Victor: That's correct, or to get a better quality tenant. 'Cause if the property is really shabby, it's unlikely -

Phil: I didn't think you were gonna say shabby there.

Victor: I’ve got a filter. So if it's really rough you'd more than likely get rougher tenants, whereas if it's in reasonable presentation then you're likely to get better quality tenants. And you need to actually involve the property manager to give you that recommendation. Taking into account that some property managers may, do go over the top a little bit, so you need to obviously tone it down. And that helps rent it out faster it helps get a better tenant as opposed to not doing anything to it. Sometimes that is a better way as well because you're not actually getting much bang for your buck if you're not renovating straight away. And it may be just as easy to drop your rent by ten dollars, get it rented out and then possibly do a renovation down the track when the market is more, better for it. And also if you spoke with your accountant, there'd be better tax benefits of doing it that way as well.

Phil: Is it possible to – okay when you look at this out of manufacturing equity – is it possible to achieve both capital growth and also achieve cash flow increases through a renovation? Should you be looking for one over the other? How do you work out, do I wait and hold and don't do a renovation and potentially decrease the amount of income I'm gonna receive offered? How do you balance all those different things?

Victor: It comes back to where your portfolio is at so in terms of whether your portfolio actually need an injection of equity to help you propel to the next property is an example. Or whether it is something that you're doing as what Steve and I have done it our portfolio, our joint portfolio where we actually bought a property specifically to create that equity so we could recapitalize to start the second phase of buying in that sense. So it comes back to where the portfolio is, what your goals are and certainly in the ideal world you want both.

Steve: And a little bit further from that it depends on your capital position so you don't want to renovate just to renovate.

Victor: Just for the sake of it.

Steve: And also take into account that if I buy a house at $300,000, spend $20,000 on it I still can't get a valuer in within a couple of months to get a relevant result. There's that time period that needs to happen before you want to send the valuers in or before the lenders have their own requirements or their own policies so-

Victor: Especially in today's market.

Steve: Especially in today's lending environment, so it actually may be better to hang on to the capital that you'd spend or use for the renovation and use that as your buffer or as part of your next purchase, whatever it may be. As long as the house, or the unit or the townhouse whatever it may be is still in a rentable, safe condition. And make the money work for you. That may not mean that you renovate straight away.

Phil: I mentioned you guys do this on autopilot and that is understanding where the upside for a property is, you professional buyers or buyer's agents so it's an innate skill that you have to be able to go, I know this market so well that I know this property in this state will get this rent and be worth this much money, you do it every day. But for people who don't use buyer's agents, what's your recommendations around understanding whether or not to do a renovation? So, do I speak to a real estate agent and say, how does that work? 'Cause I imagine you probably still speak to agents to get the information -

Steve: We always do. Yeah, because the market is quite fluid and it does change sometimes weekly. So, I would suggest that the first port of call is when you're actually purchasing the property or negotiating it and you've brought up relationships with agents, hopefully, that you actually start to run numbers past them, if I replace the kitchen is it going to increase the value? If I do the bathroom, is it going to increase its value? And then doing the numbers back and forth that way. But on the rental side of things you should be speaking a lot to your property manager and finding out what the return on your dollar's gonna be there if you do, do these improvements. Is it gonna be a better tenant? Is it gonna be a better cash flow? And of course then speak with your accountant and this needs to be all in the one pot. And it has to happen before you actually really go unconditional on the property if it's -

Victor: Yeah absolutely.

Steve: You need to know why you're buying this particular asset, is this going to be a -

Victor: What's the end goal for the property?

Phil: - an equity play, or is it gonna just be a leave it and let it sit there? And your recommendation to me on a number of the properties that we've purchased is just leave it. You know, at a point in time let's spend some dollars on it and look for an upside, but your portfolio at this point in time you don't need to do that. You're not gonna get the upsides, your money's spent better doing elsewhere and you're touching up beforehand.

Steve: Absolutely and the market will dictate as well whether you should renovate. Like if you look at the Sydney market at the moment or even over the last couple of years, you'd of probably been better off not renovating as long as the house was habitable and safe and what have you. Or the property and actually using that -

Phil: It's gonna grow anyway right?

Steve: Yeah it's gonna grow anyway, but also using that capital that you would have spent to perhaps control another property within the Sydney market and had double the effect. Now, obviously financial positions and what have you change, but you don't always have to renovate. Queensland at the moment or Brisbane market in certain areas it's a combination of sometimes you don't have to renovate and sometimes you need to in today's market to accentuate the growth of the capital value or, sorry, the cash flow. Here's a really good current example, we'll use Adelaide as an example. So we bought a couple of blocks of units down there, individual already strata-titled, so our clients all got one each and we purchased them for $200,000 -

Victor: $225,000 to $255,000 depending on the number of bedrooms.

Steve: Yeah, how many bedrooms. And that was just purely under market value giving around I think was a seven per cent yield. This is only going back eight months now, if that. And because we're quite a fan of the Adelaide market in that particular area not the whole Adelaide market, today there are some public buyers in there 'cause we couldn't get the whole block, we got like about 95 per cent of them, who have renovated the unit, so eight months later and are getting an access of $300,000 for these very same units. Now, if we were to put the unrenovated ones on the market 'cause none of our clients have renovated it, yeah there would be some pretty good inherent capital growth there and we bought under market value. But to do say, $15,000 renovation on a two bedroom unit they're gonna be getting then, probably two dollars for one spent. Now, even though I just mentioned the two for one sort of theory or formula -

Victor: There's no magic formula.

Steve: There is no magic formula, that is correct, yes. There are some people out there that teach newcomers that you should get five for one or three for one dollar spent, I just think that's crap, that's rubbish. That market will dictate that. And this is come as your assessment, right? If you know that speaking to a real estate agent or your buyer's agent would say, you purchased for X, we can rent it out at Y and it's gonna, you know because we have purchased under market value if we wait six months or twelve months we'll probably get a valuation of whatever right? And that's understanding the market, or we get this particular yield, so and might question $15,000 and do a reno, and you might estimate based on research that you might be able to get another $20 a week rent, and you should bring your capital value up to whatever it is based on comparables. But it's never gonna be one dollar for two dollars, two dollar for four dollars.

Phil: Never.

Steve: The market will dictate that.

Phil: Yeah, and absolutely. And on the cash flow side of things people often say well, should I spend $10,000 on a renovation to create an extra $10 dollars a week rent? And the quite simple, and let's pretend capital, say your capital wasn't an issue, the real easy way to determine whether you should is the return on that dollar is in terms of a percentage I'm talking like cash flow here. So, it's just quite simple: if I'm gonna get an extra $520 a year so $10 a week, what's my yield based on that, just like your bike had a yield in purchasing a property. Am I gonna get you know, say seven percent return on that invested money versus keeping it in a bank account and getting two percent.

Victor: And that's pretty pertinent with one of the clients I recommended recently not to actually do a renovation. It was gonna cost him $25,000 to renovate this particular house. I got him to explore with the property manager if he just dropped his rent by ten dollars and rented the property out, give it a really good clean and rent it out as is, would he be able to get a good tenant and hold that property? And the answer was yes, so he's lost $500 in cash flow a year, but he's managed to save his $25,000-odd, which is a deposit on another property, or part of a deposit in another property. So, you need to look at it from a holistic point of view. The reality is that with these changes that have happened with the federal budget, so one of the big changes that happened was the depreciation rules. In other words you've gotta spend the money before you can claim to procession and fixes -

Steve: Fix some things yeah.

Victor: So there will be a run of investors that are going to chase the dollar and therefore go for these renovation potential properties, which would mean that potentially these renovation potential properties will be a lot more expensive and sought after than an already renovated property. So that's just a heads up to the listeners is that you gotta do your market research, you need to make sure that you understand the market that you're buying in and know the suburb, know it street by street so that you're actually looking past the perspective that okay, if I did spend the money on it am I really making money or am I just doing the renovation just for the sake of doing the renovation?

Steve: Am I gonna be doing it just for the sake of-

Victor: Yeah.

Steve: 'Cause everyone loves to do a renovation, except for maybe you, Vic.

Victor: Expertise can't be bought. I've done hundreds of renovations, no exaggeration, but I can't even drive a nail straight.

Steve: Yeah.

Victor:  So you don't have to be a renovator.

Phil: I want to grab your point victor 'cause I think it's a very good point and a couple of remarks-

Victor: Not the libel to not to do a renovation.

Phil: No, no – two comments, number one would be for our listeners who don't use a buyer's agent, who like to do it themselves and that's cool, you're up against people like the guys at Wright Property Group who do this all the time and they know these markets inside out, so if you get carried away with the idea of renovation, you get carried away with the glamour of choosing colours on walls and stuff. You know, typically you're either not gonna buy well or you're gonna over-capitalise on renovations and your point about looking at things you can't control, so changes in budget, which is influencing depreciation but the flow and effect of that being that more people might seek renovation oriented properties because they think they can spend a couple of bucks to get a couple of bucks back, you know, will spend three get one back in terms of attacks outcome. But mash it with over-capitalising, spending money on a property that's not gonna allow you to really get too much more rent because the market might not dictate that. There's so many moving parts associated with this.

Victor: That's right yeah.

Phil: It's a minefield. I wouldn't do it myself, I wouldn't be confident to make that call.

Victor: And of course we've known of many stories where partners have broken up because of renovations because they can't see eye-to-eye -

Phil: But don't you guys have really good referral thing with family law solicitors? You wreck a relationship through a reno, here you go here's -

Steve: Ambulance chasers, right. Not at all.

Phil: Renovations bind together relationships that's what I find. Anyway that's for a different topic. That'd actually be a pretty good topic.

Steve: It would be actually.

Phil: Now, going back to Victor's point but let's do the flipside – so away from tax for a minute and let's talk about the lending environment and wanting to perhaps recycle your capital after you've done a renovation. So accentuate its value and get a valuer in. Because of the lending environment today and perhaps the downward pressure all the way through to the valuer, who are completely independent of course. There might be a little bit of pressure, but on them and a little bit of doubt within the market, on them to actually value well, let’s say in inverted commerce. So perhaps a house that is in rundown condition, yet still habitable obviously and very safe and still renting versus one that's been cosmetically enhanced, or, it may get the better evaluation not just purely because it is a better house and it's cosmetically better but just because it's a more sellable, less risky item between a valuers ears or in their eye so to speak. So, renovations might, on the other hand, come into play when you're looking to get a better evaluation in today's lending environment.

Steve: Absolutely.

Phil: Because I think the sting will come out of the market from a confidence point of view. And that means everybody from the purchaser, to the lender, to the valuer.

Steve: There is, as I said before so many moving parts of this sort of art of manufacturing equity and so that's why the best thing to do is keep it really simple.

Phil: Keep it simple.

Victor:  And I think with the lending chains and all that the first thing that you need to do is if you're negotiating on a property or looking at buying a property is make sure that the lender is going to support a earlier evaluation. So what I mean by that is when you're going back to recoup your money, is the lender, are you still able to qualify for a higher loan with that particular language is one point. The other point is, does the lender have a policy where they will not allow you to top off your loans within the first six months is an example.

Steve: Or cash out.

Victor: Yeah, or cash out yeah. And then the equally important point is let's say your renovation budget is $20,000 – double it because things won't go according to plan unless you've done that thousands of times. Even then you'll have the surprises.

Phil: Well let's talk about that. So, double the budget because of a million different reasons but probably the main one is trying to get a tradesman at the moment.

Victor: Especially in today's market. 

Phil: On the eastern seaboard? Yeah you just can't get them to name their own price and then there's a waiting time to get them no matter how- 

Steve: Waiting time means more holding costs, which add- 

Phil: All adds up. 

Steve: Now unless of course you want to do the work yourself, which we call sweat - 

Phil: Another term I phrased -

Steve: Here's one of Phil's friends, sweat equity, which does pay dividends but - 

Phil: The gist of that, all the things I've lifted from you guys… Sweat equity, pigeon-pairing –

Steve: I always sit back and we listen to you when other people say- 

Phil: I always disclose that I get it from someone else.

Victor: Bread and butter properties -

Phil: Yeah it's all right.

Steve: It goes on the mile. So, I think people really need to be true. They need to be real. The renovations aren't easy. They're very rewarding and if you can get a system down packed, if you're that person that wants to get in and not just project manage but get their hands dirty so to speak, there is, it is a pretty simple process to the renovation. 

Victor: It's very rewarding.

Steve: Yeah, it's quite repetitive. 

Phil: Well let's shout about this then, so how to spend so the goal is to spend as little as possible for the maximum upsides. The maximum upside being growth in capital value and growth in yield right? So, I've seen you do it and we've done a number of renos that you've offered me advice on. And I watch you, you walk into a property and your mind just, you see it all in one. I gotta do that, gotta do that, gotta do that. Don't do that, don't do that, don't do that. So let's try and get some of that info out of your brain. When you walk into a property what are the things you look at that you know that if you were to spend a few bucks on it you're gonna maximise yield and growth. 

Steve: For me it starts at the curb.

Victor: You're thinking like a valuer.

Steve: Yeah, and a tenant or a buyer, you know, from whichever direction you have to think of I suppose. So I'm looking, for me I'm looking at the façade whether it's- 

Phil: Curb appeal another term. 

Steve: Curb appeal, yeah. That's it. Don't get a, what is it? Don't get a second chance to make a first impression. So I'm looking for me, the front door and the gutters. 'Cause if you've got rusty gutters or something like that they stick out so paint them, paint your facial board.

Victor: Paint out the green. 

Steve:  Paint out the mission brown. Yeah, but the front door's huge to me and clean lawns, no gardens and all that sort of rubbish just have a lawn and what's your thing? Red bark.

Victor: Red bark.

Steve: And it works them into the property. And sorry the front door, like make sure it fits properly. Doesn't cost you anything.

Phil: You're really like it I remember you always go front door, paint that red so, make it a feature make it look warm and inviting.

Steve: Absolutely 'cause you imagine, you think of yourself as a tenant or a buyer coming into the house for the first time and can't get the front door open because you haven't fitted it properly. 

Phil: Like it swelled up in the wet weather and then- 

Steve: Yeah.

Phil: Give it a kick at the bottom. 

Steve: Yeah, and we speak to valuers all the time and all these sorts of thing they add up subconsciously to make, to give them some sort of direction when they put pen to paper, yeah? So as you walk in, as you open the front door, massive on paint. Paint is probably the best value for your money spent if you do it correctly. So, don't be the person that says I'm gonna paint the walls and I'll save on light switches so I'll paint the light switches. Or I'll paint the light fittings, you know, I've seen it. 

Phil: It's crap. 

Steve:  So, do it and do it properly. If you can't paint, I'm yet to meet too many people that can't paint - 

Victor:  Except me.

Steve: Saw me looking at Vic there. Then hire someone to do it and get them to do a good job it makes all the difference. Best bang for the dollars. And then of course there's your big ticket items such as your kitchens and your bathrooms but it's amazing how many times we see people get caught on the kitchen and bathroom areas where they'll get three quotes but they'll be from three random companies, let's talk kitchens and quotes on a three bedroom standard house are coming in for the kitchen at 25,000 or 15,000 or something like that, that's just crazy. Like, obviously prices are going up but you can have someone come in for a standard kitchen and you'd be out of there for 8,000 and that's everything so, we're talking about tile as flooring, you know sparky for that particular area, oven. Then obviously the bathroom as well so, yeah save yourself from the money, don't tile to the ceiling that's overkill. Yeah, it's not Kirribilli. And just get things standard. And for us when we talk about standard, we started, we got a colour stylist in and we got them to pick out several colours on which we can use for several different properties with certain aspects and what have you, and to this day we still use those colours.  

Phil: Testament to that: the last reno that we did that you sort of gave me some advice on, I've still got a tub of that paint in my mum's garage waiting for the next one. 

Steve:  Yeah see. I'll come in and get it 'cause I've got stuff to do.

Phil: Was on special. 

Steve: So we use the same colour, and it's a neutral colour obviously and we use it everywhere. Doesn't matter what state. 

Victor: The same kitchen designs. 

Steve: Same kitchen design. 

Phil: You know what's really funny is that I can look at properties on real estate dot com and know if you guys have been there. 

Steve: That's your same tiles. 

Phil: Yeah, yeah.

Steve: And if you're a DIYer, is that right? DIYer – usually the rule of thumb is for every three renovations you do, the fourth one will be free in materials. 

Phil: Yeah. 

Steve: So you'll have enough -

Phil: Look after your materials.

Steve: Yeah, there'll be enough paint left over, they'll be enough tiles left over. But don't be the person either that goes too far in trying to save a dollar – and my pet is plastic tap handles that you'll get from Bunnings for a buck ninety. 

Phil: Break in a year. 

Steve: They break in a heartbeat. So get decent quality stuff, the stuff that gets used a hundred times a day, such as your tap handles. Same with carpet. If you're gonna put carpet down, don't get the cheapest stuff, which is thin. And then of course renovate to the demographic so, and the only reason that comes into my head, that if I look, I'm talking about carpet of course – if I looked at some areas of say Sydney 'cause this is where we are today, there are certain parts of say perhaps a Parramatta railway line where I will not put carpet down, I'll tile instead purely because of the demographic. 

Phil: Yeah, that's a good point. 

Steve: So renovate for purpose, renovate for the demographic.

Phil: Absolutely, yep. Not to your taste but to what's gonna get you the result.

Steve: And here's the thing 'cause a lot of people get carried away, you know, they get emotionally invested, and to your point earlier Victor, the decisions around it need to be made on a spreadsheet.

Phil: That's right.

Steve: It's about the numbers and that's based on sound research and intelligence. So that's where the decisions need to be made when you say, I've made a decision to renovate, how do we maximise the renovation? Where do we spend the money? And you've outlined some of them right now. But a lot of people sort of start and they go, wouldn't it be nice to do X or oh, I might just do that. And it just blows out of proportion you've gotta sit down at the absolute get go, create yourself a budget and don't dictate from it. Obviously plan for the best, that is to keep on budget. You know, sorry, hope for the best plan for the worst and that is you're probably gonna spend more than what you want to. But if you stay on budget and buy materials correctly and you're willing to roll up your sleeves and do bit of your sweat equity yourself, go and do it.

Phil: You'll save a dollar. And landscaping's a big one. I just remember Cambridge Park actually where you guys were doing your- 

Steve: I got my mom out there cleaning houses.

Phil: I know.

Steve: Talk about sweat equity, right?

Phil: But I remember you guys were laying all the turf. Saving a fortune, you did the gut out or the strip out yourselves. You saved a fortune.

Steve: We pretty much did, the thing is that – and this is another point – it's probably not that we could cover it another time, but the balance of do you do it yourself versus getting other people to do it. And I quite enjoy reno, I get a lot of satisfaction out of it. I'm probably a little bit more capable than Victor is and I can do most things. You know, I can tile, I can pretty much do everything except that is in specialised trades like plumbing or electrical and you shouldn't touch that stuff. 

Phil: So any of the sort of, the unskilled labour, if you have the time and that's the key here, if you have the time then do it yourself 'cause you will save massive dollars. A handyman for example is $55 an hour, unless you're earning $100 an hour then your time's your time. But any of the skilled stuff, any of the stuff that requires licensing such as perhaps plumbing – especially being, or an electrician sparky, you don't want to touch that stuff. 

Phil: And you have a duty to care for your tenants as well. 

Steve: Absolutely.

Phil: Such a slippery slope and I've seen people try and cut corners going, oh I'll just rewire that large- 

Steve: Yeah, never. Never ever, ever.

Phil: Don't touch it. It's a really good bet for me personally I love to renovate, get my hands dirty, but I'm conscious it's time as well so, the reason why, or one of the prime reasons why I use a buyer's agent – not the fact that they can do everything they can do better than me, but I'm time poor. You know, like my weekend’s my family time.

Phil: Yeah, I'd love to be renovating, but I prefer to spend time with my family so, I'll get most of my renovations done by people who are -

Steve: And it's cost effective though.

Phil: Cost effective, and it's just because it's time. Time is worth a lot.

Steve: Time is money and if you're gonna go out there just on weekends to paint your property-

Phil: It's gonna take forever.

Steve: You'll be there for four weekends.

Phil: I had a podcast the other day, and I won't dwell too much on this, but it was a great young couple and they've done really well out of it, but the guy was a carpenter. They took a whole year to renovate a property with no one in there, you know? It's like cash flow, you know? Cash flow. Anyway they got a good outcome out of it so, we're gonna have to wind up Steve and I'll direct this question to you because I've had some experience with you and, you do a renovation? For all the reasons we've spoken about, you need to wait a bit of time to percolate and whether that's waiting for the market to recognise the value of this property or waiting for a lender to be comfortable enough and say, oh that's now worth $50,000 more than what you paid for it X number of years ago. So, you gotta wait for that time in the market. But then there's also the perception of the valuer. So you mentioned how you could create an experience for the valuer, so from curb appeal through the front door through great company inside but, if it's a short period of time between X and Y and you spend a lot of money on renovation, how can you best package that property up for a valuer so you can best highlight to them what you've done with it and therefore should quantify a much higher evaluation? 

Steve: That's a good question so the reason to get a valuer in, in a short period of time would usually mean that you've made a massive difference to the property, well you'd want to hope so. So what we always do is we'll take photos before the renovation starts, so in its worse possible condition so that not only do you remember what it's like but you're gonna show the valuer down the track on what it was like and where you've taken it to. And then you'll show progress photos and then you'll also make a list of exactly what you're doing and how much you're spending – all the way through to the finished product.

And this is what's really, really important, you need to put yourself in a valuer's shoes and you want to become the valuer. So you're gonna create a report just like they would. So you'll jump on to the computer and use tools such as RP Data as an example…maybe, Domain whatever. And you're gonna get relevant sales history to what you have. So apples to apples, you're gonna value this property like a valuer would. And you start to create the report with number one's mistreat is you know, the same product as this and it sold at X and you're gonna get as much of this history as you can, around about the same time. This is the important thing, you don't want it from years ago, you want it within a three-month period.

Phil: So you can control the perception of the valuer through -

Steve: I would never say that.

Phil: No.

Steve: That would -

Phil: You're helping them.

Steve: You're helping them do a lot of their work that it. This is like for like comparable properties.

Phil: Correct.

Victor: Give me the substantiation.

Steve: Yeah but the biggest, look some valuers love it, some valuers hate it because they might think that you're telling them their job. But it's not, you know they don't get a lot of money, they gotta do a lot of evaluations in a day and sometimes they miss comparables, so you want to make sure they don't miss those comparables. But I think the biggest key when you create this report is that you need to get at least two real estate agents' market appraisals if you're gonna sell it. 

Victor: Like get a letter and say - 

Steve: On the letter head and say if we were to market this property to sell- 

Phil: That's a great tip. 

Steve: Yeah it'll be X because that's from the salesperson's mouth, so to speak. And then if you have the relationships with your buyer's agent or your real estate agent or your property manager, I should say, give them this report, bound up nicely, just like a valuer would and have them meet the valuer onsite so they need to have that communication in retro 'cause when the evaluation's gonna happen and then hand them the report and speak to them. That doesn't mean shadow them, doesn't mean get in their way- 

Phil: Let them do their job. 

Steve: Let them do their job -

Phil: Just give them a bit of help.

Steve: Yep, give them a little bit of help and then just walk away.

Phil: Good point, good point. So: lots of concepts we've spoken about today and we've only really touched on them and it'd be risk of me not to do a standard disclaimer in that these are just a general conversation that we're having obviously it runs as we touched on certain circumstances are different so you need to make sure that when you go into any financial decision that you're sure that you've got the right support and advice there. But to wind up Victor, you guys would be happy if any of these terms, people don't understand completely, you happen to have a chat with them and- 

Victor:  Absolutely. 

Phil: So how can they get in touch with you guys? 

Victor: They can write to us, questions at – that's R-I-G-H-T or they can send us a private message on the Facebook page. Or they can reach out on our website. 

Phil: I do encourage you to do that because I like this, the whole art of manufacturing equity, there's so many different components of it through great research and buying well and renovating well and really it's the big point is understanding how that fits within your total strategy and what you're trying to achieve through property investment. Obviously through property investment we're all trying to create wealth, it's an inherent aim of everyone, but I would also make a point that you want a bit of fun along the way as well. 

Victor: Absolutely. 

Steve: You gotta enjoy it, right? You gotta enjoy it, you know? You gotta enjoy it and renovating is something where for a lot of people who may not be in a position at work where they can dictate the growth of a business or they're particular career path, this allows people to sort of take control and get some skin in the game and have some fun. 

Phil: Absolutely but just remember you don't have to renovate. It's only there to amplify the potential. 

Steve: Good summary. 

Phil: All right, nice one. Thanks guys. 

Steve: Really enjoyed it. 

Victor: See you next month. 

Phil: Yeah, we'll be back next month. If as I mentioned beforehand, if you're new to this podcast please scroll through all the previous issues we've covered quite a lot and I'm sure you'll enjoy them. But as Victor said, get in touch with them if you'd like to have a chat with them about any of the different concepts that we've spoken about. Or you just want to have a chat in general. I know from experience that these guys are happy to have chat and just to really chew the fat and understand where you're at. So, I look forward to being back again next month, bye, bye.




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