While many property investors seek to add value to their assets through renovation, OpenCorp director Cam McLellan believes that, in most cases, this strategy is just a “waste of time and effort”.
As an investor, Cam discovered through experience that the profit he gained after renovating was only a result of the market increasing.
He said: “Many investors seek to add value to their properties through renovations, but once you look at the numbers, it doesn't always add up.”
“Any profit I made was largely due to the market increasing rather than the value I added through the renovation,” the property investor added.
For a $500,000-property, an investor will spend $25,000 for stamp duty, another $25,000 for basic cosmetic renovation, and another $25,000 for a 12-month interest during holding period. As one decides to sell the property, he will need to shell out around $15,000 for the agent’s fee and $5,000 for advertising.
These numbers bring the total cost at $595,000.
According to Cam: “Just to get my money back, I have to sell it for nearly $100,000 more than I purchased it for … All I’ve really added is $25,000 worth of actual value to the property.”
If, by any chance, an investor successfully sells the property described above, the actual profit will only amount to $41,250—$13,750 will need to be deducted as 25 per cent capital from the $55,000 profit made from the $650,000 sale price.
“My equity contribution to buy the property at an 80 per cent loan-to-value ratio is ... $195,000 [That brings] the profit ... at $41,000 on a $195,000 equity contribution. This is a return of approximately 20 per cent,” Cam said.
Many people will argue that a 20 per cent return is actually commendable, but should any of it be credited to renovation?
The property investor shared: “For the last decade, I’ve achieved above 20 per cent annual return on my money investing in my developments and I’ve achieved this with much less risk than [what] comes with [doing a] renovation. There are much safer ways to make money when it comes to development.”
There may be people in the business of creating wealth through property who have found success in renovating for profit, but it takes good education and mentorship to perfect this strategy.
Cam’s final advice to those looking to dip their toes in this strategy: “Consider both profit and loss projections before renovating.”