2 rising risks that might make you rethink a house flip
As the market softens, certain risks for property investors can increase if they’re looking for a quick turnaround on ...
Here’s a fact: No renovation project goes smoothly. When people renovate, they expect everything to fall in place. Unfortunately, that rarely happens.
The thing is, very few renovations go like clockwork because you’ve got so many different moving parts — tradies, the property itself, market expectations, etc. That’s why so many people are afraid to renovate or become paralysed in the beginning.
That’s certainly what happened to me at the start, and I lost a lot of opportunities until I realised I didn’t physically have to do the work. I realised that expertise could be bought.
When you’re looking at a renovation project, there are two extremes. One is people who are paralysed by fear because renovating requires rapid decision making, which most people find stressful. The other extreme is, people get too gung-ho because they’ve watching one too many episodes of The Block.
They falsely believe it’s easy to turn an ugly ducking into a swan. The truth is, they don’t understand all of the ins and outs of renovating. They especially don’t take into account their own time costs because most people forget that time is valuable, too.
Those are the two extremes, but you want to be somewhere in the middle.
One of the ways to do that is to get educated on the process and understand that renovating is purely project management. Everyone actually manages on a daily basis in their jobs, regardless of the type of occupation. We generally follow a procedure to get to an outcome.
It’s the same with renovation, which should involve following a procedure to get to an outcome. So long as the procedure is well developed, the only other thing you need to understand is your strategy, such as increasing the appeal of the property for renters in soft market conditions. Or perhaps you’re renovating to increase equity, including through cash flow via higher rents or your property being rented faster.
The gung-ho renovators often renovate when the market is hot, which is another sign that they don’t know what they’re doing. When the market is strong, you’ll start to see more “renovator’s delights” listed for sale, and people jump on them thinking they’ll make money.
However, when you reverse-engineer the price, a property that doesn’t need a renovation — and is perhaps $20,000 more than the other property — might be the better buy because there’s less time, less stress and less uncertainty.
In a hot market, people tend to pay a premium for renovation-potential properties. However, the best time to undertake a renovation, in my opinion, is during flat market or a peaking one.
That’s because you will be forcing extra growth through a renovation or you will improve your cash flow from higher rents or less periods of vacancy.
Before you buy a property to renovate, though, you must also consider the streetscape because if you can’t change it, the project may fail to achieve solid profits. That’s because first impressions always count.
The only caveat to that is units, which means you must make sure the complex is neat and tidy to start with.
Far too many novice renovators get fixated on picking up a hammer and beginning the project rather than conducting property selection. They confuse activity with the result.
Another aspect that you must consider before you buy is the unseen money-suckers. These are the repairs that won’t add value to the property but are required to make it safe or compliant.
A good example is a property with a rusty, tin roof. Of course, you have to replace that roof because a tenant expects a roof on their house, but it doesn’t add any value to it whatsoever.
Another money-sucker is your wiring, especially old black wires, because you have a duty of care to replace them, which can cost between $5,000 and $7,000, but you will not increase the value of the property at all.
Plumbing is another money-sucker because everyone expects to turn on a tap and get water, so replacing pipes, again, doesn’t add value.
These are all of the costs that you must consider before you even consider making an offer on a property.
It’s far too late once you’ve signed on the dotted line and you’re lumped with a dud because you haven’t done your research early enough. You must lock in your profit when you buy, not try to get to the profit by renovating an inappropriate property. And in a hot market, don’t renovate. Let the market do the heavy lifting.
At the end of the day, you want to be a lazy renovator whose job is to select the best property and then project-manage the hell out of it.