Eight steps to add value to your property (and renovating is not one of them)

Renovating shows have flooded our TV screens leading to a boom in home renovations around the country. However, as we saw on The Block, there is often not a lot of money to be made out of renovating.

Part of the problem is that many people get absorbed with the hype surrounding these shows. The figures back it up.

IBISWorld forecast in August that Australia’s DIY and renovation sector would grow by 15% over the next five years and be worth $25.5 billion by 2016-17. The biggest problem is that renovating is not a game, it is a business and it needs to be run like a business.

The best way to make money out of renovating is if you:

1. Buy the property under market value.

2. Buy the worst house in the best street.

3. Are capable of doing all the renovations yourself – meaning the carpentry, electrical, plumbing, bricklaying, footings and foundations etc etc

4. Concentrate full time on the renovation. Does this sound like you?

The difficulty with making a profit out of renovating a house and selling it is because you are relying on one house to deliver the ultimate price. Consider, for example, you pay $700,000 for a house to renovate. You decide to spend $150,000 on the renovation. By the time you do the work and put the house on the market you have considerable money tied up in the holding costs for the project until you sell. If you sell.

Depending on the property market cycle at the time, the selling price is up in the air – hence this is a speculative investment, which can be very risky. If you cannot turn the project around from purchase to selling within 12 months you will have a serious problem. Or very deep pockets.

Luckily there is an alternative – development and subdivision. When you are developing a property you are proposing to build two or more houses on the one block. What this means is that you are creating multiple houses on the land, hence multiple sales and revenue. If we take, for example, a property we have bought for our same $700,000 and subdivide it into three properties, it is costing us $233,333 for each unit site. The cost of building the three will be more economically viable than just renovating one house because you can spread the costs of the development across the three properties.

With the right project team behind you, and you run the project like a business not a game, it can be very lucrative. Property development and subdivision can also mean proposing an apartment building on your property. Here are a few things you need to know:

Step 1

Ask yourself, “What is my objective?” That is, are you developing the property to build and hold dwellings to lease, or are you developing the property to build and sell for a profit?

Step 2

You need to consider the purchasing structure in which you intend to buy. The purpose of the development will dictate the type of company structure you will need to set up. It is best to engage a specialist accountant that deals with property development transactions.

Step 3

Clearly understand your financial position and, with the assistance of your accountant, determine your buying power. By knowing how much you can afford to spend you will have a clearer  idea of the property types and locations you can realistically consider.

Step 4

Research the suburbs you are interested in by physically visiting and inspecting the location and what it has to offer. Investigate the demographics of the area and review the dominant buyer and tenant types. Understanding your target market before designing your development is crucial.

Step 5

Walk the streets in and around the pocket you’re considering, taking note of the different types of dwellings on offer. Are there any new townhouse developments? Streets dominated by one style of housing (such as stand-alone houses) can present difficulties in gaining planning approval. The character of an area, and perhaps specific streets in particular, plays a critical role in council decision-making processes.

Step 6

When sourcing a property to develop pay particular attention to title documents. This document will notify you of any restrictions on the property, such as a single-dwelling covenant. The documentation will also assist in identifying the existence of any easements, which can impact the viability or potential design and layout of your development.

Step 7

Once you’ve selected a potential site it is wise to obtain pre-purchase planning advice from a town planner, who will confirm what is legally achievable for the site. Steer clear of obtaining planning advice from the local council, as the advice they provide can be conservative, which may limit the profitability of your development.

It is recommended that you conduct your own independent research concerning the site and similar approved developments at and around the location. This information is freely available by contacting the council.

Peter Bozinoski is director of ProjectFacilitator.com.au He appears on the Channel 31 show Melbourne Property TV every Monday night at 8.30pm.