The Block shocks – the reality of property renovations
Thursday, October 16, 2014/
The Block was once again a hugely popular TV show.
Three gruelling months of sleeplessness and renovations paid off handsomely for two teams, but the others failed to achieve the desired results, teaching a group of would-be overnight property moguls that there is no such thing as get-rich-quick in property.While two teams pocketed more than $300,000 each, one team took home $40,000 and two teams earned a paltry $10,000 for their weeks of backbreaking work.
The results may be shocking to some, but not to those who understand the risks involved in renovating and property development.
Now don’t get me wrong –all properties sold on the day at what I think were fair market prices, so in that regard The Block was a success.
But if you ran The Block as a business and added stamp duty, buying and selling costs, interest for the holding period and payments for labour, there was no commercial profit in doing these renovations.
But then we know that reality TV is not “real life” don’t we?
There’s nothing new about this – you can’t make money in renovations with a ‘buy, renovate and sell’ strategy. Especially if you break all the rules of property investment.
Are renovations a good strategy?
Let me be clear – I think renos are a great property investment strategy. They increase the value of your property, make it more appealing to tenants, increase the rents and manufacture depreciation allowances.
However, the concept of The Block is to make money out of renovating for a quick profit.
This is too risky – my strategy is to buy, renovate, refinance and hold for the long term. It’s just too hard to make money out of a “buy, renovate and sell” strategy.
So what went wrong with The Block?
I feel they broke many of the rules of successful property investment:
1. The wrong location. Clearly the location was secondary – a busy main road in the worst part of a good suburb.
I would have chosen a suburb where there are plenty of deep-pocketed downsizing Baby Boomers prepared to pay a premium to live.
In today’s fragmented property markets, choosing the best location you can afford is more critical than ever.
Location has always been paramount in smart property decisions and The Block showed that glitzy interiors can’t always make up for poor locations.
2. The wrong property for that location. The predominant demographic in that area are students and Generation Y looking for one and two-bedroom properties, not multimillion dollar three story apartments.
3. The wrong price. The median price in the area for two bedroom apartments is $560,000 and $829,000 for three bedroom apartments. With very few people looking for two million-dollar properties in Prahran, it’s lucky that all the properties sold under the hammer.
4. The wrong budget. The blockheads made the fundamental flaw of overcapitalising and renovating to their own personal taste rather that to the requirements of their target market.
What lessons can we learn?
So how do you ensure you don’t end up overcapitalising, as many investors do?
Here are four rules to follow to make the most of a “renovate-for-profit” property investment:
1. Determine the “right” purchase price
Buying a renovator’s delight at the right price is crucial in ensuring you are going to make some money when you finish your refurbishments.
If you pay too much for your property at the outset, you will be chasing your tail trying to make the refurbishment profitable.
Start by determining what the end value of the property will be when you have completed all planned works. You can do this by researching the value of similarly renovated properties in your area.
Once you have the end value in mind, draw up an initial project budget to calculate your approximate renovation expenses.
You should also consider getting a building and pest inspection on the property so you know exactly what you’re getting yourself into, to help plan your budget accordingly. The Block came across an unexpected underground petrol tank that would have blown the budget of ordinary investors.
Now, subtract all your costs from the end value, allow for a profit margin and this will give you a fair idea of how much you can afford to pay for your property in order to make your investment financially viable.
2. Be realistic with your budget
Fact is, the job will usually cost more than you expect and take longer than you planned. With today’s shortage of good labour, it’s hard to get tradespeople to quote on renovation jobs. We’ve all heard stories of how the budget blew out and the project took weeks longer than expected.
It’s never as easy as they make it look on TV. And, funnily enough, the tradespeople never look as good as they do on the shows either. I am yet to encounter a tradesperson wearing neatly pressed overalls!
3. Consider the type of tenant/owner you wish to attract
Think about the type of tenants you want to lease your property to and renovate with them in mind. Talk to your property manager to determine the predominant demographic seeking accommodation in the area and plan your renovations accordingly.
If you’re planning to sell, target your end product for a wide demographic, not a narrow spectrum of potential buyers.
4. Don’t get personal!
Another mistake I see investors make is that they become too personal about the renovation project they are undertaking. Remember, you won’t be living in the place; so putting your own personality into the property is not necessarily a good idea.
If you keep things simple and the decor neutral, to simply make the property liveable and functional, you can’t go wrong.
Property renovating is not a licence to print money
The results on The Block are evidence of the reality of what can happen when renovating for profit. It’s hard work, but it’s a great way to increase your rental returns and manufacture capital growth to boost your property investment profits.
To be successful you need to understand the importance of location, your target market, the competition of other stock in the marketplace and avoid overcapitalising.