How renovation can improve cash flow
renovation
1 minute read

How renovation can improve cash flow

How renovation can improve cash flow

by Demii Kalavritinos | February 26, 2018 | 1 minute read

Renovation can boost the value of a property, but it may not always be the right decision. When is it the right time to undertake a renovation, and is it always necessary?

Smart Property Investment's Spingfield property before and after renovation
February 26, 2018

In this episode, Smart Property Investment’s Phil Tarrant is joined by Right Property Group’s Victor Kumar to reveal how a renovation can provide greater assets to your portfolio and ultimately improve your cash flow.

They discuss how buying under market value can work either in your favour as an investor or be a bad investment move, as well as how to realise your portfolio’s potential without spending a fortune.

Tune in to find out the different stages of renovation, which one is best for your purchase, how it can impact your portfolio in the long run and how to get the full value back from your renovations.

You will also hear about supply and demand impacts, why every property is different and who can help you make all these decisions.

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If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

SUBURBS MENTIONED IN THIS EPISODE:

Sydney
Logan

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Announcer: Welcome to the Smart Property Investment Show, with your host, Phil Tarrant.

Phil Tarrant: Good day everyone, it's Phil Tarrant here. Thanks for joining us on the Smart Property Investment Show. I'm your host, if you're new to the Smart Property Investment Show, welcome, it's good to have you. I don't know how you found us, but happy you have done. For our regular guys who tune in, welcome back. We're going to have a bit of fun today. I have someone in the studio who you may be familiar with if you've tuned in beforehand. Guy called Victor Kumar, he's one of the directors at Right Property Group, which is a buyer's agent. Victor and his business partner Steve Waters, we do a very popular podcast with them once a month called Investing Insights with the Right Property Group where we go a little bit deeper into a lot of the themes, a lot of the systems, a lot of the processes, a lot of the strategies around creating wealth through property. I've asked him to step away from that for the day and join me on the Smart Property Investment Show to have a chat about something which is always front of my mind, and something which is even becoming more relevant for us as we look to improve the cash flow of our particular property portfolio. Victor, how you going?

Victor Kumar: Pretty good, Phil.

Phil Tarrant: Today we're going to chat about renovations. If you tuned in recently to our regular portfolio update on the Smart Property Investment Show, you would have heard that we have a reasonable portfolio. It's about $7.2 million in value, and we carry about, I think by last look, I think about three and half, nearly four million dollars worth of debt, maybe a little bit more. Go and check it out, it's all on smartpropertyinvestment.com.au. We're in an interesting position right now where we're looking to improve the cash flow situation in our portfolio, that's before tax. One of the many ways that you can improve cash flow, one of them is to add value to your property with view to try and generate a better yield, yield being greater rent, and also you have the upside of potentially capital improvement, which improves the value of your property and money that you can use to draw down in equity etc. That's the bold strategy of it, but I want to get into the details of renovations. Victor, how many renos have you been involved with over the years?

Victor Kumar: Well, I've lost count, Phil, I've lost count. I mean, I remember my very first renovation, I was agonising over who's going to replace the carpet, and that's where I started from. I think it's no secret, I've said this before, I'm not very handy with my hands in terms of doing a renovation, but a lot of these renovations is bottom line that expertise can be bought, you just need to find the right experts to help you with the renovations.

Phil Tarrant: Okay, so let's have a chat about finding the right experts to help you out through the renovations, but renos is a lot more than just doing the work yourself.

Victor Kumar: That's right.

Phil Tarrant: I think you're probably an ideal person to chat about this, because irrespective of where you're orientated, some people undertake renovations in different states, so they need to be a hands-off project manager, or they just don't have the skills or capability to do it themselves, so that's a nice way to operate. Okay, so we're talking about renovations. Most people think of renovations, painting walls, putting carpet in, new kitchens, all the nice glamorous stuff that you might see on TV. Undertaking a renovation is more than just doing, it's very strategic, isn't it?

Victor Kumar: That's right, you've gotta differentiate the different types of renovations. One which a lot of people call renovation which is a preventative maintenance, when you buy a property, it may be a little bit tired and you need to do some repair work to make the property safe and sound, and also to be able to give it a bit of longevity. That in itself is more for repair work rather than renovation, although people do call it renovation. Then the other two renovations, one's non-structural, in other words, you're not opening up walls, you're not moving walls, all that sort of stuff, so you paint, carpet, maybe put in a kitchen, and then the last one is the structural renovation. I think what most people get wrong is they start to drive straight into a structural renovation straight off without really knowing the bits and pieces that go together and they find that they're biting a bit too much to do, especially if you're doing it remote, especially if you're doing it interstate, because you've got several different factors playing, which is first for the market in that area as to whether they will like the renovation that you are starting to put together, the kitchen types, the bench shop types, the tiles on the floor and so forth, and also because you are interstate, more than likely you'd need to find the right people on the ground to begin with.

Phil Tarrant: That's getting towards the business end of the renovation, so you're talking about structural and non-structural renovations. Structural renovation's often a lot more expensive, because of the work undertaking, but also some of the requirements and processes to undertake a structural renovation, so ie. engineering reports, engineering diagrams.

Victor Kumar: That's right.

Phil Tarrant: And whether or not you need cancel approval for the work that you're undertaking. That's one thing, because many renovations, you pay new tiles, quick sort of stuff. If you tuned into the Smart Property Investment Show over the years, we undertook a classic cosmetic renovation over a long weekend once. Steve Waters, your business partner, worked with us advising on how to do it, where we went in there and we did a full cosmetic reno in three days, yeah, on Luxford Road, new paint, new carpet, new lighting, new kitchen, new bathroom. Big job, go and check it out on smartpropertyinvestment.com.au. There is lots of videos and stuff, but enjoy it. We're talking about the meat of the renos, but to my original comment, Victor, for us renovations, we're at a point where we're looking to improve the cash flow of our portfolio, and one of the upsides of that also is capital value. The question I'm going to start with, with you is when is it time to undertake a renovation? Big question.

Victor Kumar: The best renovation is the one that you don't do. What you want to do is make sure that you're not renovation for the sake of renovating. You're not renovating for the thrill of it, just because you've seen the show on TV, the Block and all those type of shows. You need to try and move away from that and make sure that you're renovating when it's absolutely necessary, when it's necessary within your portfolio to increase the cash flow, increase the value, or whether it is necessary because of the type of property you've bought and the demand from the market. As an example, a lot of people are investing in Brisbane at the moment. The rental market there is a little bit slower because of the investing activity. You may want to renovate your property to stand out from the other properties that are up for rent in that state. The idea is that you need to work out whether the renovation is going to add to your bottom line, whether it's going to add to your equity or add to your cash flow. Now, the cash flow doesn't necessarily just mean that it gives you more rent. It could also mean that the property is rented out a lot faster in comparison to the other properties in the market at that time.

Phil Tarrant: Renos are tricky because, and you might have heard of it, if you tune in, this idea of overcapitalization, and that means that the money you spend on the reno, you're not getting a return on your investment, fundamentally. Often time can help fix that problem, time being that the property goes up in value, therefore it catches up, but you don't want to be overcapitalizing as an investor, your renovation. There's a couple of times you can do renovations.

            One can be at the time of purchase, and a lot of stuff now, portfolio, and Victor I know the work you do with your clients, you look for under market value properties, and on Investing Insights with the Right Property Group podcast we did with you, we did a really long session on that, probably two or three months ago, so go and listen to it. Securing properties under market value, you want to secure a property at the point of sale which is under what its value can be. That can be that you are securing it at a point of time in the market where perceptions of properties are very different, or a point of time when someone can't move because it's undervalued, it's not marketed very well. You can go in there and do a renovation at the time of purchase, and that's very different to doing a renovation once you hold the property, during a period of time when you are two, three, five, 10 years in, and you may need to change it to bring it up to market status or to what you were saying before, move it faster. Let's have a chat about renovating at the time of purchase and buying under market value.

Victor Kumar: Sure. The first thing I'd say, Phil, is that a lot of people get caught up with the fact that the property is advertised as renovator's potential or renovator's delight. Generally, depending on what shows are on TV that season, those properties may go for a premium in comparison to something that actually doesn't need renovation, because people tend to think that just because they've bought a property that has got renovation potential that they are going to make money. From the outset, you need to work out that by putting your money in terms of renovating as soon as you've bought the property, is it actually going to add value or add cash flow to it straight away, or are you just buying a property at a premium because it's got that tag, and really you're no better off than buying a property that's already renovated or in decent condition and perhaps paying just a little bit more than the property that's in question and not have that time factor come in, or the uncertainty of different trades come in in terms of getting it up to speed.

            Having said that, of course, there is really good money to be made in terms of property renovations. It is a cyclical thing, so generally in my portfolio, what I've done is I've targeted these types of properties, more so in a slower market than a fast-moving market. In a fast-moving market, I try and postpone my renovations, because I let the market do what it needs to do first before I think come in with a catalyst, which is the renovation, to further kick up its value. Sometimes what you find is by doing it that way, you may be able to scale back your renovations. At the end of the day, the major cost factors in any renovation is really the kitchen and the bathroom, which is by far the largest ticket, big ticket items, and then you've got the logistics about paint, carpet, and all this sort of stuff. We need to look at it from that viewpoint.

            In your comment in terms of below market value, a lot of people mistake that as how many dollars you get off the listed price. What we're really talking about in terms of below market value is it's unrealized potential. We are uncapping its unrealized potential. The property sells for what it's really worth in the vendor's eyes and in the purchaser's eyes, and certainly the bank's eyes. What we're trying to do with a property of that nature is to get it to a different category, so therefore you're realising that it's market potential at that point in time.

Phil Tarrant: You're moving it to a different category to realise its potential, that by spending as little as possible.

Victor Kumar: That's right, yeah. Look, a lot of people run around and have different formulas about it has to be a third of the value of the property, or you know, a certain formula, less than five percent as an example. I actually don't subscribe to any of those formulas. You need to make it as reasonable as possible, and making sure that once you've spent the money, you have the ability to recoup the money by way of the added equity or the added cash flow from the property, rather than operating off a formula, because each suburb, each property is very different. As an example, if you could get a property that might cost you a lot more to paint because it's got lead paint on it at the moment, and that is more expensive to take off and prepare before you start painting. Typically a three-bedroom house as an example, some of the three-bedroom houses that I've done recently, they're costing me anywhere between three to five thousand dollars to paint internally. If it's got lead paint, you practically double it.

            Then also comes in the factor of where the market is in that area in terms of how busy are the traits in that area. If you take as an example Logan in Brisbane, right now if you compare prices of works right now to about three years ago, there's at least about a 50 percent increase in pricing.

Phil Tarrant: That's just supply and demand, isn't it?

Victor Kumar: That's right, yeah. If you've done a renovation set three years ago and you're operating off the same figures and you're doing your sums based on the same figures, you're in for a surprise.

Phil Tarrant: Interesting. You spoke about getting the value back of your renovation through either higher rent or high capital value, high capital value being something that you might be able to draw down to keep your investment journey. That's always going to be different for everyone. There's no magic formula to 20 or 30 percent of the renovation should be about increasing the rent versus 70 percent is capital value. It just completely depends on your portfolio.

Victor Kumar: It depends on the portfolio, yeah.

Phil Tarrant: How do you work that out?

Victor Kumar: You've gotta look at each property on its own individual merits, so just because you've had another property in a different suburb that you've renovated and pulled all your money back out, it might not work on the property that you're renovating right now. That needs to be taken into account, and more so right now with how lending is working, you gotta factor that in as well, because the lender that you're with might not allow you to top off your loan pretty much straight away. When you're doing a renovation, you've got ideas of pulling all the money back out, it may not be physically possible because of the lending constraints.

Phil Tarrant: Who can help you make these decisions? I'm fortunate that I've got a good buyer's agent who helps me understand the inherent value in some of these properties and the value of doing a renovation. I've got a really good accountant, I've got a good broker, all this sort of stuff, which I speak at length with. If you're just doing this by yourself, how do you work out, whether or not, number one, undertaking a renovation's a good idea? Can you speak to a real estate agent and say if I do X, it'll do Y?

Victor Kumar: Look, you've gotta look at the buyers first, right, so where are they coming from in terms of giving you those recommendations. Are they looking at you and saying okay, this is one sale to me, talking purely about a real estate agent, is this one sale to me or is this a multiple sale relationship. Ideally, you want to have your team around you first, so tap into the expertise before you actually need them, and build a team around you, but let's say you're starting out and you want to go this journey solo, you would want to talk to multiple agents in the area, and agents from both sides, so the sales agent and also the managing agent, because at the end of the day, you could do, from a sales point of view, from a sales agent's point of view, a fantastic renovation, but it may be the total opposite to what a property manager in that area would want for their tenants. You need to be talking to both and working out what you can and can't do. Certainly lean on the property managers for their trades to begin with. Look, when I go in new area and I've forged new relationships with the agents, so I definitely lean on them, but I also go into high pages, HI, and you can post your jobs there, and you get quotes. You get all sorts of quotes.

            To begin with, I suppose you need to know what your baseline is, how much painting a three-bedroom or four-bedroom house is going to cost in that area to begin with, how much does a kitchen cost, and all that sort of stuff. Once you've got that baseline, you can then sort of work off the quotes that you'll get off of high pages, and then of course you ask for previous clients if they're willing to talk with you to get a feel for how they operate before you engage them.

Phil Tarrant: It's complicated.

Victor Kumar: It is, yeah.

Phil Tarrant: Let's get inside the head of Victor Kumar when you walk into this scenario, three bedroom property in, let's do Sydney, because Sydney's an interesting market right now. To your point earlier, this rampant price growth that we're seeing over the last four or five years has really slowed down, so it's a transitioning market, you having a lot of investors who are exiting the market. We've seen a lot of price growth, and you typically find that rents should follow price growth a little bit behind it, and we've spoken about that before at length. Let's say you want to do a reno in the Sydney market, because you know you're not going to achieve organic price growth for the period of time, but you can manufacture some price growth through doing a renovation, and also, you can make a more attractive proposition for tenants. Let's choose Campbelltown, which is an area you know well. You walk into one of your properties in Campbelltown, which was built in let's say the early 1980s, where a lot of us built out there and it hasn't been touched since. What do you do, what do you see, and how do you go about it?

Victor Kumar: Absolutely. The first thing I look at is the street appeal to begin with. You can have the best looking house that's perfectly slick inside. If it doesn't have any street appeal, my biggest income earner, which is the tenant, is going to drive past it, prospective tenant is going to drive past it. They won't fall in love with the house, or they won't see themselves living in that house. Yes, the pictures on the net would be nice for the kitchen and the bathroom and so forth, so I look at it from that viewpoint as to can I change the streetscape? Changing streetscape is pretty simple. It could be that it's got horrid paint on the outside that we need to paint out into more acceptable colours. Gardens, I don't like what I call grandma plants. This is what your grandma would have planted say 30 years ago, and it's all unkempt and blocking the house from the street. I try and make it as simple as possible, as pleasing to the eye as possible. I look for that factor first before I actually even go into the house, because the house in itself once in the house, there's really only one or two variables.

            The rest is all pretty standard. We know that the first variable is how it flows inside, which is is it poky rooms, is the kitchen at the back and you've gotta walk through two rooms to get to the kitchen? Is the laundry outside, is the laundry inside, is the bathroom really poky, so that's a variable. The other variable of course is can it be modernised, has it got the old archways that was the norm in the eighties, can that be modernised? The reason why I say that is a lot of these properties may actually have asbestos inside the house as well, so we need to factor that in.

            Those are the two variables that I look for, and then I look for any potential structural issues that I may uncover without doing a test in building, so this is just a, it's a visual that I'm going through straight off and I'm negotiating the property, so I look for cracks around windows, I look for floor movements, I look for leaking bathrooms, all those sort of things first, because they're the ones that will take a lot of money. Then I look for things that will need to be done, but doesn't really add value to the property. A good example would be wiring. Yeah, so when you renew the wiring in a property, it doesn't actually add value to the property, but it's essential, you need to do it. A standard three-bedroom house in New South Wales would cost you around the $5,000 mark.

Phil Tarrant: Upgrade the switch.

Victor Kumar: Yeah, not just upgrade the switch, upgrade all the wires in the building as well. If you've got the old black wires as an example, so if you're talking the eighties, a lot of this would potentially still have these black wires that we need to change, certainly upgrading the switches and all that sort of stuff. The plumbing, of course, if it's got the old gall pipes, we need to change those as well. There are things that you need to do as part of a renovation. It is possibly a duty of care to do, but it sucks money away from you and doesn't add to the value of the property. A tenant expects to flick a switch and have the lights come on. A valuer walking in expects to flick a switch and expect the lights to come in as well. They don't jump into the roof space and say okay, you've put new wires down, I'm going to give you an extra 5K because you've spent that. Similarly, every property has a roof, so we can dress the roof up in the sense that we can paint it, but it doesn't really add that much to the value of the property. Certainly adds to the street appeal, but doesn't really add that much to the value of property. I mean, you don't buy a house without roof, so you expect a roof inthere.

            Then I come back to okay, what can I get away with and what would I absolutely have to do? As an example, if we look at the kitchen, that's my biggest cost base by far. Can I paint the kitchen and make it look a lot fresher and potentially newer, or is the kitchen so far gone that I have to replace it? If I'm replacing it, am I changing the footprint of the kitchen? Then we move to the bathroom, same thing. Can I put in a separate toilet that's not in the bathroom, but a separate toilet itself, because that's the demographic. You've got a larger family area in that area, so you need to cater for that. The laundry itself, can I bring it inside if it's already outside. Those are the things I look for, and I'm mentally making a note of how much it's going to cost me as opposed to what the value is, and then I work backwards from there.

            Let's say as an example, you'd be hard-pressed to find a property at 400, but let's say it was 400,000 in that area. I'm going to work backwards from there to say okay, my renovation's going to cost 20K, then to factor that in into my buying price, so that even if I have an overrun in terms of renovations, I'm still in the money, I'm not overcapitalizing. The reality is with renovations, especially when you're opening walls, when you're moving things around, you get into the unknown, because you don't know what you don't know until you open the walls up, yeah? Coming back to the bathrooms, simple things such as if the base of the bathroom is pretty good, can I tile straight over the tiles rather than taking the tiles off, rebuilding it, and then tiling on that. We've got a perfect base, we can tile straight over that house. Yes, it'll make it a little bit higher so there's a bit of a lip, but that's the demographics of the area. You can get away with those sort of things. You need to know those things before you even start making offers on them.

Phil Tarrant: You're talking, there's two things that are working in unison. Number one is purchasing the property for a price, knowing that you're going to have to do a certain number of renovations to bring it to a point which is going to increase the capital value of it and attract potentially a new class of tenant, point number one. Point number two, using all those things that you see as a tool to negotiate the price down.

Victor Kumar: Absolutely.

Phil Tarrant: A lot of people forget about that, so you can use that as part of your arsenal when you're negotiating saying look, I've gotta rewire the place, I've gotta re-plumb it, no value to anyone, but that's going to cost me 20 grand, so you use that as a stick to try and get around.

Victor Kumar: Correct. Mentally, a lot of people already see themselves renovating and see themselves painting the walls and all this sort of stuff as they walk into a property. They're falling in love with the action rather than falling in love with the result. That's something that you need to perfectly keep in mind is that don't fall in love with the action.

Phil Tarrant: Let's say certain example, you secure this property, you know you've got a bit of work to do in terms of wiring and plumbing which you can't see, but there is an adjudicator to make sure it's up to standard, and there is some cosmetic stuff that you can get done as well. Okay, you've negotiated down, you've secured the property for a price that you like, it's time to get going on the renovation, what's the first thing you do?

Victor Kumar: Get a scope of work up and running. In other words, get a plan for the property, because if you don't start with an end vision of the property, what you'll find is that with the many turns during the renovation, you lose your way, and before you know it, you're well up of your budget. Yeah, so definitely have an end vision of it as to what you're doing, where you're spending the money, and then during the settlement period is when I prefer to get all of my quotes, so that the day you're settled, potentially you hit the ground running, and you're lining up the trades in a way that they're not under each others' feet.

            As an example, you definitely don't want the floorboards done before the painting's done, yeah, so all of those things need to work hand-in-hand, and quite often if I'm struggling for trades, you ask the kitchen guy whether they know a painter, you ask the painter whether they know a floor sander. That's how you, if you're starting out, that's how you can build a network. Some of them, yes, you want such a good experience the first time around, especially if you're just starting out, it's the blind leading the blind, so to speak, because you're trying to learn as you go, and tradespeople may see you coming a mile away, so they can cut corners and so forth. Equally importantly, you have other trades that will happily talk with you and give you guidance. Sometimes you've gotta look at the guidance from your viewpoint as an investor to say that okay, yes, he's coming in from a puristic point of view, to say that it has to be done this way.

            A good example is when I started renovating my initial properties, I had a big argument, well, not really argument, let's call it a discussion, with the trades I was using at the time, because they basically were saying no, you can't put tiles over tiles. I had to actually educate him to say no mate, it's all right. He said, well, it will split off, it won't be stable. I got him into a couple of other properties. This was a person that I knew very well, so he had done painting and a bit of handiwork for me before. I got him into a few other properties and showed him what I really meant, because sometimes when you are trying to tell them something, they're seeing a different picture to what you're trying to paint, so it's good to put it in visuals. By doing so, I was able to save myself at least $1,000 on that renovation, because when you take the tiles off, they gotta go somewhere, right, which is in the skip bin. It adds to the weight, adds to the space, plus you've got the labour component.

Phil Tarrant: The time taken up, it's a pain.

Victor Kumar: That's right.

Phil Tarrant: Just on that point, and I know some of the renos that I've done, you need to know your building products, because there's special glue that is purpose built to put tiles on tiles, and unless you don't know that, you're not going to know.

Victor Kumar: Yeah, at the time, and this is quite a few years back, more than a decade back, that product was fairly new on the market, yeah, so that was something that the handyman didn't know at the time, so it was a bit of an education process for him as well. We actually ended up in Bunnings where the product was to actually show him.

Phil Tarrant: There it is there, use that.

Victor Kumar: Illustration, yeah, that's right.

Phil Tarrant: Okay, so you buy the place, you use the settlement period, so you've made a decision to undertake a renovation before you get a tenant in, and on that base side, laws have changed now in terms of scrapping and appreciation and all of that sort of stuff, doesn't really matter anymore. There used to be a component you had to think about. You use the settlement period, three days, for example, to get a scope of works and ask for help if you don't understand what you need to do.

Victor Kumar: Yeah, absolutely.

Phil Tarrant: Is that when you get your real estate agents in, your property managers in and say, I intend to do this, what sort of product is that going to create, how you going to be able to market that, what's that going to do with the capital value? You get all your trades lined up during that period, so the day you pick up your keys, you send the traders in to do what they need to do.

Victor Kumar: Absolutely, yeah. There's some prework to happen before that, obviously, so usually two weeks out from settlement, I'm calling all the trades to say, are you ready to start, ready to start, because tradespeople run late on jobs as well, so if it's raining pretty heavily, they may be delayed by a week. You need to know that, just because you've had one or two conversations with the tradesperson doesn't mean that they've diarized it and they'll start on the dot because they have other jobs so they need to be in touch with them. Also with the property manager, because things could change. I had one property where I had everything scheduled to go, and the property manager said actually there's a tenant that's willing to take the property in its present condition, and obviously it wasn't a safety issue, so we postponed the renovation. Some of the trades will want upfront payment or deposit, so you need to be really mindful of how much you give, remembering that you want to control the bulk of the money so that you hold the upper hand, and it's not that the tradesperson's got the majority of his bills, he's going to slow it right down.

Phil Tarrant: Yeah, well a tradesperson's going to want all their money up front, right, because most of the time, they're struggling with cash flow.

Victor Kumar: That's right, that's right.

Phil Tarrant: Just on that note, to actually get the best trades for the first reno you do and subsequent renos, you pay quickly. Once the work's done, and trades like to get paid.

Victor Kumar: You get to the front page of their book, right.

Phil Tarrant: Which is where you want to be. If you're a reliable, predictable client of theirs, you'll get the best out of them, and hopefully they'll work harder for you and do a better job as well.

Victor Kumar Look, even the best tradees have bad days. They could have multiple things happening in their lives, and they may have done a sterling job in the first property and not such a good job in the second one. You've gotta take it along with how it flows. Certainly before you hand over the money, you need to actually inspect the property. What I tend to do is I get my property manager to go in and inspect the property, because they're looking at it from a different set of eyes. They're looking from a tenant's perspective, and when the tenant vacates, is this going to be an issue? Such as simple things like dollops of paint on the windowsill that's not supposed to be there or on the windowpane, that would point all those things out.

Phil Tarrant: Yeah, so the finish, because a lot of people get 90 percent done but then you're still left with scraping paint off windows, and that's a real pain and slows everything down.

Victor Kumar: That's right. There's not a big gap between a really good job and an average job. It's just the finer details.

Phil Tarrant: It's complicated, renovating. So many moving parts.

Victor Kumar: It is complicated. It's excited as well, and I guess that's what people tend to pursue. Like I said in the beginning, the best renovation you do is the one that you don't.

Phil Tarrant: Yeah, and I completely agree with you. I myself fall into the trap. I like renovating. I do enjoy the physical process. Unlike you, I can use my hands and stuff. My day is typically, it's this, right? Talking to people or doing what I do, I don't often, inverted commas, get on the tools, so I actually enjoy doing it. The speed of my life and busy-ness means I don't really get to do it. I haven't really done a big reno in Sydney for a number of years now.

Victor Kumar: We can change that.

Phil Tarrant: We can do. Maybe we go back and do another reno in the Sydney market, maybe as a bit of an example, it'd be good fun.

Victor Kumar: Well, you know, were tapped.

Phil Tarrant: I know, what are we doing, Victor, what are we doing? Good, so we would have wind up, and I think we'll keep on this, because everyone, the topic of renovation and manufacturing, whether it's at the point of purchase or during a different market cycle is important, getting trades into line, getting them through the property at the right level in terms of you get your wiring done first, make it safe, your plumbing, then you move into your kitchens, you actually might get a small cosmetic stuff like your painting and fittings and stuff like that. Let's say that's all done and you've got the job finished, then it's just a matter of getting the tenants in, isn't it?

Victor Kumar: Absolutely. Well, you've gotta make sure it's nice and clean and it's got that new car smell. Just coming back to the kitchen, just understand that there's a lead time to the kitchen, just because you said the kitchen needs to come in tomorrow.

Phil Tarrant: Might take six weeks to get it.

Victor Kumar: Might take six weeks to get the kitchen itself, so you need to start as early as possible for changing the kitchen, start as early as possible with the kitchen itself.

Phil Tarrant: If you signed a contract and paid your deposit, you got say 40 days, you might buy it at auction or whatever, but say you got 40 days, 40 days is about right, isn't it, for a settlement?

Victor Kumar: That's right.

Phil Tarrant: As the new owner of the property, you might not yet own it, but on paper you've signed a commitment to purchase it, you have all rights to gain access to the property during that period of time.

Victor Kumar: You need to negotiate that up front, because what if it's unoccupied? The vendor won't want people waltzing through their property. That's one of the things that I do, negotiate with any of the properties that I'm buying and also for my clients as well is as a standard, we want an early access clause, not to do the renovations, but to plan the renovations, so getting quotes and so forth and showing prospective tenants through as well. The important thing is you need to understand that a lot of people try to get into the property before it settles and try to do the renovation. It's got its merits, but it's also got a lot of risks with it as well. As an example, let's say you've repainted the property during the settlement period, so you don't actually own it and you've painted the property. For some reason, the sale falls through from your end, so let's say the bank pulls the rug from under you, especially in today's finance market, how do you unpaint a wall? You've gotta think of it that way.

            Also, you don't really know the vendor's circumstances. Will he be able to settle at the time of settlement? I've got a property that I exchanged in Melbourne that I exchanged last year in August, and we still haven't settled. That was a 30 day contract. We still have-

Phil Tarrant: Your reason or their reason.

Victor Kumar: No, their reason, their reason, no. If I had, and there's a strong chance that they might not be able to settle for some time yet because of some legal issues. Now, if I had gone in and done the renovations, there's money sitting there in that property, not really working for me, whilst the saving grace on this one is the market's still moving upwards in the area.

Phil Tarrant: You're getting all the benefits.

Victor Kumar: I'm getting all the benefits.

Phil Tarrant: It's like an option, right?

Victor Kumar: That's right. I've put $5,000 down. It's sitting in a solicitor's trust account, which brings me to another thing, never release the money to the vendor. It's sitting in a solicitor's trust account, so I'm controlling a $350,000 property with $5,000, and the market's turning upwards. The reason why I bring that to the table is that if I had done the renovation on that property and the vendor can't settle and it's more than likely they can't settle any time this financial year, that's a long time for the money to actually sit there, and by the time you're ready to settle, things may change in the property. Someone could come in and vandalise the property, as an example. That becomes your problem, because you've got full access to the property. That's something that you really need to think through and it is a risky proposition, so you've gotta look at it from the viewpoint that you are using or spending the money that you can afford to lose.

Phil Tarrant: To your point about doing a reno, renos and for all of our guys out there listening, a lot of the questions we get is all around this reno stuff, and they like to put a bigger focus on it, and looking back at the text message you sent me, I think you listened to the podcast I did with Steve Waters, your business partner, around improving your cash flow. I think you hinted that maybe it's time to actually get some things going. Maybe let's do this, I think, yeah, let's follow the journey through another reno. I'd like to do it in Sydney, because I've got a shipment of tiles in a kitchen, and it's all sitting there in a warehouse actually.

Victor Kumar: Welcome to my club, right?

Phil Tarrant: I could pretty much do a reno of all the gear I've got. I've got paint sitting there, I've got everything ready. I'm trying to think which property in our portfolio would be right for reno, or whether or not you think the Sydney market is right for us to do it, is it worthwhile? Is there a case study there?

Victor Kumar: Properly if you're looking at your available property, maybe a granny flat construction there would be something that you'd look at, and certainly it'd push the rental yield right up. Certainly it's well positioned to actually have a granny flat on it.

Phil Tarrant: It is.

Victor Kumar: In terms of renovations in Sydney with the properties that you've got, I think you've pretty much renovated every single one of them, right?

Phil Tarrant: There's that Mount Druitt property, but it's just a two bedder. It's got a big laundry which you could turn, anyway. Let's take it off live, we can have a chat. Our commitment, I'm going to keep chatting about renos. I think even if it's up in the Brizzie market, we've got some work underway right now in one of our properties there in Kingston, and that's to manufacture some equity in it. Some of it is remedial work, the first point you made around is the renovation you need to do because you have to do it, you have a roof falling in, all this sort of stuff, but there's also some value add work going on there. We're not doing anything structurally, but some of it's remedial and we are getting some ballistite’s at the right height, etc., so duty of care stuff, but trying to make it a little bit nicer, get a better set of tenants in there. I keep chatting about renos, Victor, and let's get you talking about it with us.

Victor Kumar: Fantastic.

Phil Tarrant: It's good. I enjoyed that. That was really long, about 40 minutes or so. Even in 40 minutes, I think we just covered the very basics of renos.

Victor Kumar: Just scratched the surface.

Phil Tarrant: Yeah, they're complicated in that there's so many moving parts with a renovation to make sure that number one, you're doing it for a reason, and then number two, how do you maximise the benefits of it without going over time, going over the budget, overcapitalizing, pissing people off, stressing yourself out, and then finally getting someone in there to realise the value of it, or a lender realising that you spend maybe 40 grand doing a reno and not just valuing it up by 40 grand, saying oh, there's no difference whatsoever, so blowing it over.

Victor Kumar: That's right.

Phil Tarrant: Anyway Victor, enjoyed it mate, thank you very much.

Victor Kumar: Fantastic, good Phil.

Phil Tarrant: We'll keep chatting about renos. There's already quite a lot on smartpropertyinvestment.com.au. Go and check it out, we've done quite a lot of reports over the years around renos, plus shared other people's stories they've renovated, so go and have a look. If you have any questions at all around renovating, anything you'd like us to particularly talk about, editor at smartpropertyinvestment.com.au, the team will pick it up and we'll get onto it. If you're not yet subscribing to Smart Property Investment daily morning market intelligence around property and everything that's happening, be the first to know, smartpropertyinvestment.com.au/subscribe. Remember smartpropertyhq is our Twitter handle, go and check it out if that's the way you like to get your information. Please, just a really small request that if you can keep those reviews coming on iTunes. We really do appreciate it. As I mentioned before, it's just not me sitting here behind the microphone and our guests, there's a big team behind making this show happen and they do appreciate the feedback. We'll be back again next time. Until then, bye-bye.

Announcer: The information featured in this podcast is general in nature, and does not take into consideration your financial situation or individual needs, and should not be relied upon. Before making any investment, insurance, tax, property, or financial planning decision, you should consult a licenced professional who can advise whether your decision is appropriate for you. Guests appearing on this podcast may have a commercial relationship with the companies mentioned.

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