At a time when many people are feeling fear around rising interest rates and the fluctuating property market, Bernadette Janson discusses 5 surprising renovation and micro-development strategies to minimise risk and maximise profit.
1. Minimise The Risk of Flipping in a Changing Market
Flipping is possibly the highest-risk renovation strategy with the lowest return in the long run. Especially in this climate of increasing interest rates and an uncertain future, it’s important to make adjustments to manage risk when flipping properties. If you are planning to flip you will ideally have prior experience with renovating and be aware of the risk.
i. Ensure You Can Hold the Property If Necessary
Markets go up and down, and if you buy high and find yourself in a falling market when selling, your profit can be eaten away. Personal experience has shown how important it is to know, at the time you buy, that you can hold the property if you need to.
In a prior downturn, I didn’t think we could hold a property we renovated. We sold it and didn’t make a profit. Had we held onto it, it would certainly have gone up in value exponentially. – Bernadette Janson
ii. Buy at a discount
To help manage risk, buy properties that are highly undervalued, such as hoarder properties. They can often be a goldmine because they are so undervalued.
iii. Save money and achieve flexibility by owning the furniture
Owning the styling furniture is really beneficial on a number of fronts. Firstly, you save the costs of styling when going to market. Then, if you need to take the property off the market to manage a difficult sales climate, you can almost seamlessly rent it out on the short-term or Airbnb market. When conditions improve or you are ready to sell, you avoid a second fee for styling.
2. Add Exponential Value when you renovate
Here are some of our tried and tested options for adding value.
i. Do a Cosmetic-Plus Renovation – Our term for renovations contained within the building footprint. Add value to the property beyond just the cosmetics to make a much larger return on investment. If you do this in a cost-effective way, managing your budget effectively, then you can take the project into a new price bracket.
Last year one of our renovators made an extraordinary profit by transforming a three-bedroom, one-bathroom house into a four-bedroom, two-bathroom, two-living area property, by converting the garage – all under the one roofline. – Bernadette Janson
ii. Add Significant Value through Structural Renovation
A structural renovation involves extending the building beyond its current footprint – for example, adding an extra level to a single-story property. Be aware that this renovation strategy requires skill and due diligence. Because it will require council approval and add an element of risk to the project it’s not for the faint of heart. But if done correctly, can result in exponential growth in the property value.
3. Leverage Lower Property Prices and Benefit in the Longer Term
In a rising interest rate climate, there is an opportunity to take advantage of lower property prices. It’s important to have the capacity to pay holding costs over a longer period, but the benefits can be worth it. Here are some ideas for how you can really leverage a falling market.
i. Landbank – Buy up two or three projects and hold onto them until you’re ready to renovate and sell. This is a good strategy for a few reasons. Firstly, you’re buying low and will hold the properties until you can sell high. Secondly, it provides a steady flow of renovation projects into the future. Thirdly, it helps overcome the risk of red flags, or buyer mistrust associated with renovating and flipping a property quickly.
ii. Look for Properties with an Extra Land Component and apply the micro-development strategy – Buy a large block with a house in need of renovation. Renovate the house, and get approval to add one or two new dwellings to the block. This way, you insulate yourself against a fluctuating market by spreading the risk over multiple properties – instead of just one.
For example, you may buy a house on a large block for $600,000. If you can create two extra blocks, then, each block might then be worth, say $200,000. If the value of the lots drops down to $550,000, instead of one property losing $50,000, you’ve spread that over three.
In this case, you are actually using the idea of renovating the original house to get your land for your additional houses for free. I say free in quotation marks because it’s not always totally free, but certainly significantly less than if you went out and bought land to build on. – Bernadette Janson
4. Use Your Principal Place of Residence to Supercharge Your Wealth (and Your Retirement)
Your own home is the jewel in the property portfolio for many reasons – but the main reason is that any profit that you make on that project, if you sell it, it’s tax-free for most people.
And you can supercharge your profits if you can renovate your own home as part of a downsizing strategy. Downsizing is fantastic because it gives you 4 opportunities to profit.
i. Maximise the Value of Your Existing Home – Renovating your own home help can help extract the most value out of this important asset. Most people are just too lazy (or unaware of the potential) to undertake such a renovation. It helps if you are motivated by a passion for creating beautiful homes and can enjoy it.
ii. Buy a Doer-Upper – Then, profit from downsizing is by selling the original home and buying a doer-upper property at a wholesale price, instead of a fully renovated property at retail price. Renovate the new property and add exponential value.
iii. Create an additional income stream from your doer-upper – You could do this by buying a house with the opportunity to add a secondary dwelling for rental income.
iv. Add Surplus Funds to Superannuation – Work with your financial planner to see if you can add your surplus funds into your superannuation, giving you even further benefits in retirement.
One of our Wonder Woman did this just prior to Christmas. She and her husband sold their large home on the Central Coast. They bought a doer-upper in North Narrabeen for a fantastic price. It also has a quaint little studio that they can rent out to others. Even in the long-term rental market, it brings in a substantial amount of income. – Bernadette Janson
5. Renovate for Airbnb or Short Term Rental
In many areas, short-term rental (which Airbnb has made famous) is a great strategy to significantly add to your income from property. However, there are also some areas where oversaturated supply and government regulations are resulting in falling returns. Exercise caution in places like Queensland’s Gold Coast and Byron Bay and the Central Coast in NSW.
It’s really important to do your research because you need to find a gap in the market if you’re going to go down the Airbnb path. Online tools can help, but going deeper is essential to ensure accurate results. Explore the need in your area, and identify your market – and preferably a niche – before spending money to set up an Airbnb. Your niche is not necessarily where you would expect.
I know a host renting a fairly modest family home in remote Queensland. It brings her about $5,000 a month. We have a Wonder Woman who provides accommodation for the film crew. It’s very niche. Both women know their niche. You need to find yours – and it’s not always in places that you would expect – Bernadette Janson