Hi all,
Firstly, thank you to all the active members on this forum – I've learnt a significant amount from simply reading discussions over the past couple of months which has no doubt put me in the position of taking a leap of faith today.
I am in the process of settling on my first investment unit in the same suburb where I have my PPOA (also a unit). The property is somewhat undervalued (suburb median for a similar property being 370, with purchase price below 300).
The property itself needs some work of course, and my intention was to buy, renovate (with the aim of increasing weekly rent) and hold for a minimum 5 year period (capital growth strategy, IO loan). I have assumed approximately $20k worth of renovations to update the bathroom, kitchen and paint/floors.
Upon relooking at the math however, I'm now evaluating whether I should renovate now (scenario 1) to increase the rental from $300 to $360 at a cost of $20k, or whether I should hold at (scenario 2) $300 per week and renovate prior to sale after a 5 year period.
My math would suggest that from a holding perspective, net annual cost would be only $1k higher with scenario 2, although there would be similar tax savings (or slightly higher even in this scenario).
Of course while there will be a lower holding cost with the renovated property, I'm failing to see what benefit would be in investing the $20k now. If I understand correctly there would be some depreciation benefits of the works, but would it be enough to justify the exercise?
Thanks in advance for all that will no doubt help. Really appreciated,
Leap of faith first time investor!
Hi Harry,
Your post is very heavily focussed on potential rental increases but does not seem to discuss any increases in property values.
If your $20K investment can turn into a $50K/$60K increase in property value then it could well be worth the effort.
When building your portfolio you need to lend money and having surplus income and asset value is to your advantage. Generally speaking you can accelerate the process through effective renovations.
For what is worth. Of the two options buy and hold or buy, renovate and hold you have given the second one should be more effective from an investment strategy point of view.
If you get $60pw extra that's say $50pw clear = $2600pa
The reno will cost $1300 in interest per year. So you will be $1300pa in front + depreciation.
In a few years will it be bad enough to restrict rental increases? With a newly renovated property I would expect rents to rise with inflation (at least). So in 5 years time the unrenovated property may be further behind than the $60.
Why are you planning on selling in 5 years? Of course the reno will be 5 years older. How good are the things in it now? Will you need to spend money fixing things (dead money)?
Also with the increased equity from the start you could revalue and access the equity to buy further.
Thanks Derek and Catalyst.
The apartment is in pretty bad shape now; the $300 rent per week reflects this, as the median sits between $350-400 in the suburb for similar properties
I understand the concept of the reno costing let's say $1.3k a year in interest, assuming I am borrowing to renovate. If I do renovate, however, I will be using cash that is sitting in an offset loan attached to my PPOA as I am borrowing close to the 90% mark (keeping below this to ensure LMI doesn't blow out).
In this instance, is it still recommended to use the cash (and therefore increase interest owing on personal debt) to renovate?
Harry – I do feel there is potential for strong value growth in the property itself given it's situated within the Parramatta area.
I guess the real question is to renovate now, or to renovate later prior to any potential sale.
Given the above further clarity, does it still make sense to renovate ASAP and thus demand a higher ASP and also manufacturing capital growth?
Thanks again in advance for your insightful responses.
Harry
My comments still stand. Do the numbers.
If you can't borrow the money cash is fine but it's not free money. You are forgoing the money in your offset so you are paying tax on that. BUT it's actually costing you more as it's not deductable.
I'd do it now. You may not even sell in 5 years time and the reno would have paid itself off in that time (with increased rent and depreciation). If it's in bad shape it will get worse over the next 5 years and you may have trouble getting a tenant.
All the above points people mentioned are mainly focus on the rent and revaluation.
I would also look into how much the holding cost for un-renovated and renovated property ? and what's the projection in 5 years time ( of course it's hard to estimated)
Given the interest rate is relatively low right now, it may come back up in a few years time.
Hence if you do the reno while interest rate is low now get a better tenants. when the time comes to sell you don't need to not face high interest rate holding a vacant property during the reno process.
just a thought I hope it helps.
Good luck.
Taylor
Where abouts in the Parramatta area is this located?
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scha9799 wrote:All the above points people mentioned are mainly focus on the rent and revaluation.I would also look into how much the holding cost for un-renovated and renovated property ? and what's the projection in 5 years time ( of course it's hard to estimated)
Because rent greatly affects holding costs. Holding costs of an unrenovated and renovated is what was discussed.
And there's no point in doing a reno if it doesn't change the rent and reval (which is why all the above people mentioned it)..
Like Catalyst – with the cash option you have mentioned nothing really changes in my opinion other than having a buffer of some form is important.
In general terms I would not be overly concerned with LMI costs. Having said that I am not fully conversant with your situation to make further comment.
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