Episode 82: The 80/20 Rule Of Renovating Profit
On today’s episode,
In this episode I will share with you “The Pareto Principle” and basically it means that for many events, roughly 80% of the effects come from 20% of the causes. And that principle applies to all aspects of our life.
How does it apply to a renovator? When you are doing a renovation for profit, the small amount of work like putting together the deal on your projects can make the biggest impact to create that 80% of your result.
Listen to Episode 82: The 80/20 Rule Of Renovating Profit
Podcast: Download (Duration: 23:29 — 23.65 MB)
- [00:00:43] Online Bootcamp update
- [00:02:11] Strategy call
- [00:03:09] Hands Across The Water
- [00:06:36] The 80/20 Of Renovating Profit
- [00:07:46] The Pareto Principle
- [00:10:08] A reno project
- [00:15:57] Applying the 80/20 rule
- [00:17:52] Taxation implications
- [00:19:02] Feasibility
- [00:21:05] New podcast reviews
Hands Across The Water
Place your donation (over $99) here to get a FREE strategy call with Bernadette (valued at $220)
Well, hello, renovators, it's Bernadette back with another episode of She Renovates. Before I get into the episode, I want to give you an update on where I am and what I've been up to.
And basically, I've been trying to find a project and I think we're getting closer. So hopefully in the next couple of weeks I will have something. But in the meantime, it's keeping me busy.
The other thing is that we have a new group of students coming through our new bootcamp and so basically I'm producing that as we go. Unfortunately, I'm one of those people that works best under pressure and if I was just to give myself a lot of time to do this, I would find it took forever. So I like to create some pressure to keep it productive.
And so I have this awesome group coming through and I think we're going to end up with some stellar renovators out of it. We have in our community 2 or 3 properties on the market and we've got a couple of renos actually starting and a lot in between. I've had my Airbnb shut up while Covid was on but I've actually opened them up again and have quite a lot of long term guests so I'm pretty happy with that because it's much less work.
The other thing is that I am doing dry July so during Covid our happy hour got way out of hand. And so I decided that's well, past us so it's time to read the riot act. Now, I'm doing it for myself but also to benefit one of my favorite charities, but I'm doing it with a little bit of a difference.
So basically what I'm doing is that so we have a thing on our website called a Strategy Call. And if someone wants some help with either their reno or their strategy or just some help to make decisions, they book a call and it's a couple of hundred dollars. And I have saved in that call, saved people thousands so it's good value.
And so what I'm going to do is that if anyone would like to make a donation to my charity for every donation that's over $99, I'm going to offer you a strategy call. So the call is usually $220 so that way I've got some skin in the game. So if you and anyone that is willing to donate to this amazing organization is my sort of person and I look forward to working with you.
HANDS ACROSS THE WATER
Now, just to tell you a little bit about the organisation, it's called Hands Across The Water. Up until the last year or so until I broke my knee. We used to do a 500 kilometer bike ride across the hills of Thailand in 5 days and of course, it's not happening this year as a result of the virus. And unfortunately, the organisation has really been impacted by the Covid virus because people are suffering themselves, they're not as able to donate to this fantastic cause. So we're putting our hats up to help with that.
So if you would like to take part in that, if you get the show notes and I'll give you the details in there and a link, so all you do is go over to the organisation, make your donation, and then send your receipt through to Judy, my supergirl. Her email is [email protected] and she will set up a strategy call with you and I. And we can talk about whatever you like.
And if it's some challenging construction issue, let me know and I'll bring along my construction guru, Stephen. Or if it's an architectural issue, I'll bring along my architectural guru, David. So, yeah, we've got you covered.
And just a little background on the organisation. So it was started by a forensic policeman, an Australian forensic policeman called Peter Baines. He was in Thailand after the tsunami identifying the bodies and he came across a little group of orphaned children hiding under a boat and so he made a decision to do something about it because they had lost everything. And so since then, it has grown to a point where they look after around about 350 children from all sorts of disadvantaged backgrounds. Some have HIV/AIDS and up until Hands Across The Water took over that orphanage, they'd had over a thousand little ones die from AIDS and since they've taken over no one has died. So that is a testament to how fantastic the work is that they do. I've actually been to the orphanage 2 or 3 times and so it's an incredible organisation.
And the other thing that I really love about it, and this is one of my motivations for supporting, is that Peter himself runs some, I guess you'd call them social enterprise businesses to cover the admin costs. So that means when we donate 100% of the money goes directly to the kids. So a lot of gripes about charities is a lot of the money gets sort of whittled away with admin costs. Well, with this donation, it all goes to Hands Across The Water to look after the kids so there's no admin costs taking out of it so I think that's pretty incredible.
Now, before I start the episode, I need to remind you that the information in this podcast is general in nature and should not be taken as personal advice. For the advice to be personal, you need to meet with your specialist accountant, financial planner, financier, so that they are able to give you written advice based on your circumstances, so you minimise the risk and maximise the profit.
Today's episode is called “The 80/20 Of Renovating Profit”. Now, I have noticed when I go around looking at renovations when I'm going to open inspections that often renovations that are not done to a terribly high standard still get good prices and I've thought about this a lot. And the reason that is the case is because in lots of areas the market is not as discerning as we would like them to be. Now, don't get me wrong, I have no intention of lowering my standards in terms of the finished product because I take great pride in producing a quality renovation but I think the moral to the story is that we put a lot of focus on the actual renovation, particularly DIYers. And there is a section of the work that is much more important. Now, I've alluded to this in other episodes but I wanted to bring just a little bit of theory into this and then I'll give you a practical way of applying it.
THE PARETO PRINCIPLE
So, basically what I'm talking about is the Pareto principle. Now, this principle was discovered by an Italian man by the name of Vilfredo Federico Damaso Pareto and he was born in Italy in 1848. He went on to become a very important philosopher and economist but the story goes that one day he was in his garden and he noticed that 20% of the pea plants were generating 80% of the crop. And then when he started to look elsewhere he noticed that this phenomena of distribution was happening everywhere. 80% of the land in Italy was owned by just 20% of the population. He investigated different industries and found that 80% of the production came from 20% of the companies.
And so that principle applies in all aspects of our life. And if you think about it, you will realise that it is actually true. So basically, 80% of the car accidents are caused by 20% of the drivers. 80% of lottery tickets are bought by 20% of the population, 80% of air pollution is caused by 20% of the population. 80% of internet traffic goes to 20% of websites and 80% of the time people use 20% of the tools that are at their disposal.
Now, that's the theory behind it, but what does that mean for a renovator? So you might be asking, what's this got to do with you? And the thing is that small hinges swing really big doors. And when you are doing a renovation for profit, there is a small amount of work that makes the biggest impact, it creates 80% of your result. And that work is the putting together of the deal, so doing the deal.
A RENO PROJECT
And this was never more obvious to me than a couple of years ago. I was looking for a project and I was going to lots of, quite a few years ago actually, I was going to lots of auctions and always being the losing bidder and I was quite frustrated by this. And then one Thursday evening, I was up quite late on realestate.com, just scouring the internet for properties. And I went to bed quite late and the following morning I got a phone call from my agent talking about a property that had gone up on the internet the night before. And I hadn't seen it because I was looking on realestate.com and it was on Domain. And yes, there are some people that are too mean to advertise on both, which absolutely blows me away.
And so this property was listed with a guide of $650K and it was worth at least $1M. So I rang the agent who turned out to be a solicitor who was out of area, which is always good when you're looking for a bargain and said to them, "I would really like to see this property because I've been looking and I'd like to see it today" because the guide was so under quoted. I knew that once come the Saturday when the first open was that every man and his dog would be over it. So I rang and said, "I'd like to see the property today and can you send me through a contract?" to which they said "No" to both of those requests. So it turned out it was being sold by a solicitor and on behalf of one of his clients, they didn't have the time to be running around doing inspections out of hours and did not have the technical wherewithal to be sending out contracts via email, which again, is quite astounding.
And so I had looked at lots of very similar properties. It was a house, it wasn't an apartment. So I'd done the due diligence in terms of the plan quite a few times but I just needed to do some sort of due diligence with the council and with our financier on this specific project in order to be able to make an offer because it was pretty clear that if I wanted to get that property off the market, I was going to have to buy on sight unseen. Now, the price was being guided, like seriously, it could have been asbestos to the core and it wouldn't have mattered because it was just so under quoted. And so I got my solicitor on the phone so that we could review the contract over the phone and then I headed down to the office of the solicitor to see if I could get them to cooperate.
And so to cut a long story short, his wife was manning the station because he was in court. I managed to strike up a conversation with her and at the end of that conversation, she had shared the contract with my solicitor and told me to make an offer, leave a check for the deposit and she would get her husband to deal with it when he got out of court. Now as a result, I bought that property in probably a couple of hours and I think it was about, it was low eights that I ended up paying for it, which was around about $150K-$200K undervalue.
And there are a few drawbacks with it. One, I had to release the deposit which is always a bit of a risk. And two, the owner had been a hoarder so I had to deal with that, which was also so I allowed another $20K in it to cover the emptying of the house. Now, as it turned out, the house had no power because at some point in time, this man had been living in the house. It had no power because at some point in time there'd been a roof leak and it had wet the wiring. And instead of having that repaired, he just ran an extension cord from the meter box at the front door. Because he was such a hoarder, you just walk through this narrow lane in between all the boxes of rubbish, there were no rooms that opened out are all full of stuff and you walked down to the kitchen at the back and that was this dingy little kitchen where he lived.
And so I never actually saw the house until after we had bought it and when we did go in, it was quite dark because there were no lights. There was something massive in the living room and I couldn't figure out what it was. Anyhow, when we got lights on, it was a massive white ant nest that was so heavy it had dropped out of the first floor into the main living room and taken part of the floor with it and there it was like this massive boulder in the middle of the living room. I’m probably giving you some unnecessary detail but I thought it was quite interesting.
So because I bought it so undervalued, what I was able to do was to get D.A. plans to renovate it. So I got council approval to renovate it, put the whole plan together and then sold it to a builder. Now, from that project, I made $120K profit and doing, I don't know, about 100 hours work. And so I felt that that really brought home the value of not thinking about productivity in terms of how busy you are and what you do but basically the quality of what you do, that small things, things that don't take that much time, have a big impact on your project. And it was from that that I deduced the big thing, profit. Now, not every project starts out with $120K profit like that one did but you do need to have profit in the deal before you start. And that is the 80/20 of renovating.
DOING YOUR FEASIBILITY AND DUE DILIGENCE
And it goes a little bit further than that. So a lot of people think that the big deal about renovating is the actual onsite work and there is no doubt that's important. But how the on site work goes depends how well you put the plan together right back there in the beginning. So in that instance, I'd put the plan to give out on other terraces. So I pretty much had the plan but not exactly for that property. But in that timeframe of doing your feasibility and doing your due diligence you actually set yourself up for the result that you want.
I've often talked about knowing the taxation implications of your project. So this week or last week, I had an incident where I actually went to look at a project and this particular student hadn't covered off that little piece of the puzzle. And if she had kept going down the path that she was planning to go down, then she would have probably paid about half of her profit in tax. So just by covering off those, they don't take long to do, but they make a big impact on the result that you're after.
THE 80/20 OF RENOVATING PROFIT
The 20% of the work that produces the 80% of the profit is the work that you do, putting together the deal. So that includes the due diligence and the feasibility process, which I outlined in Episode 80. So if you want to go back and listen to that, if you're a bit rusty on that.
And so all those things that ensure that your project goes well, that you have minimised your exposure, you have minimised your risk, you've maximised your profit potential you have bought the property at the right price. So that depends what the right price is and depends a lot on what the market's doing. So if the market's going up, well, then obviously my right price is at value. And if you can get it below value, that's great but it's harder. But if the market's not going up, then you want to be getting it under value to be able to deliver that profit. So that's also part of that 20% and I think the important thing to know is that there is time that goes into these skills, all the research you do, the building of relationships so that you have a solicitor that you can get on the end of the phone if you need to and will speak to you at short notice if you need to. All that work goes into you being able to be incredibly productive at that point in the project.
And so if you want to be good at making profit from renovating, that is where you should be putting your focus. Now, as I said before, it doesn't mean that you don't pay attention to the actual reno. So the reno is the 80% of the work that still needs to be done but if you don't get that 20% right, then you are pushing uphill. And so that couple of days that it takes you to put the deal together will pay back to you in spades. So that is the 80/20 of renovating profit.
Now, before I go, I want to firstly say we've had a couple of really lovely reviews. I am always so grateful of people taking the time to leave reviews because it just lets us know that we are delivering value. That's what I attempt to do but it's always nice to have that confirmed. And a couple that we got this week, I'll just read one out. So this one was from Bec, "So much to share. Very generous. So it's 4 stars. Very generous with information and advice. Enjoy the welcoming feel of the podcast to be part of the community. Also, wonderful to know there's a strong relationship built through this renovating group." Well, thank you so much, Bec! That is awesome.
And then I should read this next one because I know who this is from, "Fabulous renovation podcast. I'm a huge fan of She Renovates. It is informative and relatable. There are loads of golden tips to help you earn an income from property. Bernadette is experienced and kind. And she has a lot to offer and gives a lot to her listeners. Thanks, Bernadette." And that's from Budget Reno Queen, Michelle. So Michelle actually joined me on the podcast several episodes back. What I'll do is I'll include Michelle's episode in the show notes. And don't forget to go back to episode 80, that was "10 Killer Steps To A Flawless Feasibility." And if you haven't left us a review, please do so because we love reading them and we really appreciate it and it helps share the news and let other people know that the podcast exists. So thank you!