Hello everyone,
I’m becoming interested in the idea of value adding through renovation.
I’m already an expert, I’ve seen an episode of the block and to make extra money I just need to find some unrelated staged game that pays me for finding worthless stuff hidden in a maze.
…But I still need some advice.
Thanks Corey for this article
https://www.linkedin.com/pulse/how-grow-investment-portfolio-limited-equity-corey-battThese articles are great.
What I’m after, I’m having trouble finding good answers for.
What’s the profit ratio which works for you?
I’ve heard everything from 10-400% from online. That’s quite a range. Have any of you had any experience? What has been your margin? I can’t imagine bothering for 10%.
I have my reservations re Peter Spann and his leapfrogging, but in essence the ideas are ok, I’m not sure I think his books really detail things as well as I’d like.
So, any books or resources you can suggest I’d be interested.
In addition, this one is for the brokers, I’d like to hear about finance.
I’ll go with a scenario.
Purchase $500,000
Deposit $50,000
Loan $450,000
Line of credit renovations add $50,000Now with the magical unknown let’s say I manage an excellent 100% return
New value $600,000How would I go about accessing that equity? Would I get a second mortgage? How much can I pull, given the LVR went from 90% to 75%? Can I only take 5% without paying LMI again? Or can I take back up to 90% as the original loan? Could I push it to 95% if the loan allowed?
I’m interested in any information you can share. Thanks.
What I’m struggling with (linkedin acticle) is how do you service the loans if you purchases multiple properties when having to DIY some of the work. This means you’d be doing the Diy after hours etc? Rents are only going to cover some of the re payments. At some point you will reach your limit and have large amount of debt.
Maybe I’m looking at it the wrong way? ?You would simply go back to the same bank and ask to borrow more.
You could increase your loan to 80% LVR or go up to 90% LVR with LMI payable (but a credit received for the amount already paid).Make sure you consider the tax aspects of loan structuring – you would probably want to refinance the $50k used from the LOC so that you can use this LOC for the next property. Make sure all loans have only 1 purpose – no mixing.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
@jltarra I’m actually not going to answer your question, just like you haven’t answered mine.
Thanks again Terry you’re amazing.
@storybuilder there was no question just adding my 2 cents worth
Hey @storeybuilder – that article looks familiar. ;)
In terms of releasing equity out post renovation – you can either release to 80% and pay no LMI or release to 90% and pay LMI. Keep in mind however that any LMI already paid is credited into this mix, so you may find you’re paying minimal LMI to release significant equity funds.
In terms of borrowing capacity it comes down to income vs outgoings – generally this strategy will *slow* the decrease in borrowing capacity as effective rental return is higher from renovated properties, but it isn’t never ending. Using this strategy carefully whilst keeping personal debt to a minimum and yields strong will allow an investor to maximise their capacity as much as possible.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Thanks for the artcile and further explanation Corey.
Thanks Corey and Terry for explaining the LMI I never knew there was a discount and this is a game changer for me, I’ve got an existing loan where I can probably access another $60,000 that I was afraid to use due to LMI. I didn’t realise there was a discount. Now I’m excited to use it.
I never intended for anyone to perceive that I would do this endlessly, it was just a tool. In the great words of Basher
https://m.youtube.com/watch?v=G8Kvkg3h-rg
Like you say, it would slow the decrease in borrowing capacity, since I was talking about LMI I thought it obvious there would be a limit. Is it still $3,000,000 for LMI do you know?
I’m still wondering about profit margins, Steves book gives examples of around 100% ROI but this seems even more elusive as not many people are giving real figures. I’m not saying it’s not true and some things make perfect sense, don’t build a pool and do use paint, I used to in fact be the pool man and it’s a definite expense. It’d be good to hear from those who’ve done renos.
Now @jltarra you asked plenty of questions actually, for the benefit of all I’ll answer but normally forum etiquette would be to at least attempt to help answer the questions the first poster (me) asked.
I’m not actually necessarily diy, I was asking about Reno.
How do I service it? I take some cash out of my Scrooge mcduck vault.
In seriousness, I earn great money so it doesn’t make sense for me to diy myself, that’s why I’m interested in margins, to see if it’s affordable to pay someone else, even if I pay them what I earn per hour, they’re better at the Reno job than me and there would be many benefits to paying them. How would I service it? I earn great money and my one investment property is basically cashflow neutral. I also save 70% of my income.
There has rarely been a time where rent has so closely paid the mortgage so easily. We are lucky to be at this part of the economic cycle. Yes, I intend to hold big loans and lots of property. Have you read Steves second book? There is a strategy along these lines.
@terryw I was thinking I’d need to see an expert like you re using LOC if I went that way because the next house would end up being cross collateralised I would have thought. I’m not sure how to keep them separate unless you use second mortgage which I’ve heard can be hard to do in this kind of scenario (using the equity from one property). Any info you can share would be great, but it’s probably something I feel I need an expert’s help in anyway.
Thanks for the quality answers that were given so quickly.
No need to cross collateralise – because you can do the same thing without.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Have you asked your broker about a tentative on completion loan? If you can give clear details of the completed reno ( example of kitchen with materials to be used etc) the valuer should be able to give you a final “on completion” valuation which will save you having to apply for a new loan or loan variation later. Don’t forget to factor in your purchase costs which usually come to around 5% of the purchase price. In your example it would be about $25,000.
Good luck,
AnnI Reno full time and as a basic rule I have a minimum nett profit of 10% of the purchase price. I use the 10% minimum as a basis to work off when doing initial numbers on a property but in most cases my profit is 20% or more.
Eg if I purchased a property for 200k I would expect a minimum nett profit of 20k before I even considered putting an offer in. In the early days I was happy to take a 20k profit and was doing most of the work myself. I have now become a bit more savvy and years of physically doing renovating take there toll mentally and physically. I would now only make an offer if I could expect to safely make at least 40k profit off a 200k purchase. I am averaging about 8 renos a year depending on the market and my appetite.
Obviously the rule of 10% doesn’t apply for cheaper properties as I have purchased property for 120k and definitely wouldn’t waste my time if I was profiting 12k.
I like to pick and choose which properties I keep for the portfolio depending on a few things, cashflow from the individual Proprty, future growth potential, my own serviceability, etc…
Hope this answers a few of the questions.
Hi Pascoe
I like your strategy, do you invest in Sydney or Melbourne or in regional towns.Mainly regional at the moment but have invested in capital cities previously.
I just don’t like competition when Im making offers, they start to become irrational offers if too many people are looking to purchase. I’m finding that any profit in the cap cities you mentioned would be more cap growth based than actually off the back of a Reno… Which is fine, it actually works well to have some growth along with the Reno but I feel those two markets are a little risky at the moment and unaffordable in general.
@pascoe_82 I like your investment style. I share your views about capital cities I have previously invested in both and although in regional towns the capital appreciation is not there you usually know what your profits are going to be before you sign the on dotted line.
Don’t get me wrong capital appreciation is always great but I’m wary of my debt levels considering I don’t have a crystal ball.@storeybuilder thanks for your reply although you’re right I didn’t answer your question being a public forum I thought it was all about everyone’s input.
No need to cross collateralise – because you can do the same thing without.
Thanks Terry even better to know
Have you asked your broker about a tentative on completion loan? If you can give clear details of the completed reno ( example of kitchen with materials to be used etc) the valuer should be able to give you a final “on completion” valuation which will save you having to apply for a new loan or loan variation later. Don’t forget to factor in your purchase costs which usually come to around 5% of the purchase price. In your example it would be about $25,000.Good luck,Ann
Thanks Ann, this helps answer both of my questions with a sophisticated approach.
I Reno full time and as a basic rule I have a minimum nett profit of 10% of the purchase price. I use the 10% minimum as a basis to work off when doing initial numbers on a property but in most cases my profit is 20% or more.
Eg if I purchased a property for 200k I would expect a minimum nett profit of 20k before I even considered putting an offer in. In the early days I was happy to take a 20k profit and was doing most of the work myself. I have now become a bit more savvy and years of physically doing renovating take there toll mentally and physically. I would now only make an offer if I could expect to safely make at least 40k profit off a 200k purchase. I am averaging about 8 renos a year depending on the market and my appetite.
Obviously the rule of 10% doesn’t apply for cheaper properties as I have purchased property for 120k and definitely wouldn’t waste my time if I was profiting 12k.
I like to pick and choose which properties I keep for the portfolio depending on a few things, cashflow from the individual Proprty, future growth potential, my own serviceability, etc…
Hope this answers a few of the questions.Thanks Pascoe,
Yes it does, I think 20% is a good number. Good to know it can be done. Now I’m off to find a $10 million property :) seriously though, it encourages me to try it a few times.
I think the best way to crunch the numbers is 10% profit on the higher valued properties, 400k and up, and 20% under 400k. That’s how I would look at it anyway.
…And for your 10mill property just use the 1% rule. Haha
pascoe, do you recommend any courses at present? I would like to chase low hanging fruit initially. I did a full reno years ago and did everything that sherie barber recommended we NOT do. Of course i found this out after i had completed the reno. And no i didnt make $ but raised the rent by about 300pw because it had an unused granny flat. What do you recommend a newbie do to start in the 350k or under price range?
cheers
Hi Gowide,
I actually haven’t taken any courses on this and just built to the point I’m at now through experience. You know what they say, learn from mistakes and don’t see mistakes as failing, use them to move forward, although may have been a bit faster to learn from others mistakes.
Yes my first Reno sounded very similar, increased the rent but failed to make any real profit. Having said that I still have my first Reno in the portfolio and is now having some good growth. Even if you make a mistake real estate can be forgiving, You only make a loss if you sell.
I rarely make mistakes anymore and through constant progress have got it down to a reliable strategy. But at the end of the day we never stop learning and I’m learning new things everyday.
An important Piece of advice I could give is to buy something that is affordable for yourself, which sounds like you are by looking under 350k. Also make sure you have more than enough funds to complete as this is one mistake that can slow a project down significantly and cause a lot of sleepless nights. Allow for the budget to go over by roughly 10-15k. A 30k Reno can easily turn into a 50k if your not careful.
I now JV with a lot of different partners, halves the risk but halves the profit also. In the big picture I can actually achieve more in the long run by using my skills and others money or vice versa depending on my situation at the time.
Hope that answers your question.
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