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Property Investing

Why Renovating is Not Always About Profit

I am sure you have seen the TV shows?

So easy, to transform an entire house from top to bottom in less than an hour, while making thousands of dollars in the process!

All you need is a top team of tradies, preferably someone in short shorts and a cute puppy dog.

Before you know it, you could be flipping your way to thousands in profit!

But in reality, it is very different, particularly in Australia with our Tax laws.

This type of strategy is also very different to building long term, sustainable wealth.

If you are looking to build your wealth faster, property has a mechanism built-in to fast track the process.

The ability to Add Value, something you cannot do with any other asset.

It can be called an ace up your sleeve for investors.

Here is a Case Study for a couple:

The brief was to find a “renovators delight” in a high demand, investment grade suburb.

Because this was not to buy and sell, but to hold and focus on longer term wealth, they were able to renovate accordingly.

They could renovate and spend a little more to upgrade it to a “owner occupier” standard, they didn’t have to scrimp and save and cut corners to make a profit.

The property has now become a set and forget investment for the next 20+ years to create a higher level of wealth for them

Not Always About Profit

Profit can be both the most important factor and the least important factor when deciding to undertake a renovation.

Obviously, you would want to make a profit otherwise the exercise would be pointless.

But it should not the primary focus, particularly if you are looking to build long term wealth.

So, what could it be?

Widen Your Asset Base

For some investors, widening your asset base could be your primary focus.

So rather than focussing on a $30,000 or $50,000+ profit, you could undertake a renovation to fast track your wealth and achieve you goals faster.

So, the biggest benefit is clearly increasing the value of the asset, but there are more reasons.

Some of the other benefits will include:

• Additional Equity

A boost of additional equity may assist you to get into your next property quicker.

Rather than relying on the market to do the heavy lifting, a renovation could assist you to manufacture more equity faster.

• Boosting Cashflow

Even for some smaller renovations there can be a boost in cashflow in terms of increased rent.

Under the new tax laws, the cost of the renovation could also have depreciation benefits.

Therefor an increase in rent and depreciation benefits, will quite often boost the coffers or decrease the cashflow gap and increase serviceability.

• Lower Expenses

An old, tired and run-down property will require a higher level of maintenance and outlays, while an updated and new property will not.

• Appeal

Naturally, there is something special about living in a nice, new, fresh space and it is the same for perspective tenants as it would be for buyers.

These types of properties can have high demand resulting in superior returns.

Investing in a Renovation

If you had $50,000 or $80,000 in a term deposit or savings account, or even in an offset account, it may not be working hard enough for you.

The options to consider could be another investment grade property.

Or, it may be to invest it into a simple, cosmetic renovation of your current investment property.

With savings rates anywhere between 0.001% and 1%p.a., investing in a renovation, in a high growth location may see returns of up to 5% – 7%p.a. plus, over the next decade or two.

This will have your savings working much harder for you over the longer term.

Summary

There is something rather “romantic” about transforming a rundown old property into a modern and stylish home.

So, you can consider to renovate with the aim of flipping for profit, or, as mentioned, look at a longer-term wealth strategy that could increase your wealth faster with a view to widening your asset base.

Your choice …

Source  :  https://propertyupdate.com.au/why-renovating-is-not-always-about-profit/

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