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I attend a class with Steve McKnight a Melbournian investor with the bestselling book “From 0 to 130 properties in 3.5 years” in it Steve talks about the importance of cash flow and how he only buys cash flow positive properties with good yield. Over the weekend however Steve told our class that if he was to start all over again that is not the strategy he would take. If he was to start again Steve would use his knowledge to do quick-cash deals in order to build up his kitty as quickly as possible and then invest it into debt free commercial property returning 8%.I will discuss this strategy next week, but today I want to talk about cosmetic renovations.

Renovations are at the heart of nearly every Kiwi, the idea of taking something old, making it new and making a decent profit on it just resonates with us as a nation. However it is also something so many people do so wrong. The idea of a renovation is to add more in “PERCEIVED” value than “ACTUAL COST” This means spending money only on things that add value to the property; these are things that can be seen. Unfortunately if you completely rewire the house and fix the gaping hole in the roof you are not actually going to add any value as those are things everybody expects a house to have in the first place.

Before going in and renovating you must have a plan. You must understand how the numbers work. I use Dean Parkers guide and have altered it to fit New Zealand circumstances. Take the house price times it by 1.3, can you sell the house for that price in that area. Go for a walk through houses advertised at that price and see what they have that you can add to yours. As a guide for renovating, you should allow for, 10% of purchase price for renovation costs, 4% holding costs, 4% selling costs, 2% buying costs and 10% profit. Of that profit allow for 28% tax (Company tax percentage, this will change depending on your structure). If you spend any more on the renovation costs then you are over capitalising.

I start with my profit motive which is $30 000 per deal, add 28% tax and that means my gross profit is $41 600. Now by the rules if that is a 10% profit margin I have to buy a house worth approx $410 000 renovate it and then sell it for $530 000. This may sound difficult but the trick is to find somewhere with a median house price roughly in the middle of that. Look for houses around the $480 000 mark.
I.e. Blockhouse bay, Lynfield, Mt Roskill, Takanini, Mangere Bridge. – I will include the current list at the bottom of the page.

The next step before even picking up a tool is you must know who your target market is. Major profits are made when you have the right property, at the right price, targeted towards the right market. This creates a bidding war among purchasers. You should also focus on the scarcity of the area. If there is a lack of parks in the area, then buying a house near a school with a decent back yard and BBQ area will fetch more than one without. If you are in an inner city suburb then a lock up garage will add huge value to the property. Do your research see who are the home owners in the area and what do they want.

In general you should not do the Reno yourself. Your time is too important; you could be out finding the next deal. There are a range of professionals out there who can do a better and quicker job. What you save from not paying a professional, you will probably pay in holding costs anyway. If you are cash strapped in the beginning; then doing a small cosmetic reno on weekends is a great start, but you will only build true wealth once you start leveraging off others.

Median House prices around the mid 400’s

Waterview

3 bed

$465 000

Glen Innes

3 bed

$419 000

Avondale

3 bed

$446 000

Panmure

3 bed

$449 000

Mt Wellington

3 bed

$435 000

Blockhouse Bay

3 bed

$471 000

Mt Roskill

3 bed

$485 000

Lynfield

3 bed

$490 000

Otahuhu

4 bed

$409 000

Papatoetoe

4 bed

$459 000

Takanini

4 bed

$489 000

Wattledowns

3 bed

$439 000

Mangere Bridge

4 bed

$490 000

New Lynn

3 bed

$410 000

TeAtatu Peninsula

3 bed

$435 000

Massey

4 bed

$480 000

Glen Eden

4 bed

$459 000

Sunnyvale

4 bed

$459 000

 

Hope this helps and I look forward to hearing your success stories.