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30 December 2009

Renovate, but be realistic with your time!!!

Investors seem to get more interested in renovation projects if they're able to contribute labour themselves. This is often a good idea.

'Often?' I hear you say? If you're able to save money by doing it yourself, why isn't it always a good idea? One of the main culprits is where investors are too busy with their full time job to commit to the additional work. A little time passes and this eats away at the project's profitability.

A 3 bedroom house is bought in Brisbane as a renovation project. It costs the buyer $420,000 and needs work to a kitchen and a bathroom. The investor creates a brief schedule of works:

Bathroom & Toilet
1/ Replace tiles
2/ Replace leaking cistern
3/ Replace cracked shower screen
4/ 4 x new cupboard handles
5/ Paint all walls and ceiling

1/ New splash-back tiles
2/ 17 x new cupboard handles
3/ Replace lino with tiles (much needed update on a 70's style green & brown)
4/ Paint all walls and ceiling

For a renovation project, he's avoided the costly elements and the work should give the property a real lift. In this example, our buyer is a painter. He's good at what he does (he's in high demand), so there's money to be saved. After crunching the numbers, it looks like a winner... on paper!

By doing the painting himself (including some touch up work inside and outside), the investor expects to save about $1,000 on the painting alone. By using people he knows and trusts for the remaining work, he expects to save an additional $1,500.

After buying the property, his workload continues to be high with many painting jobs in the pipeline, keeping him busy with 50 hour weeks and little time to spend with his young family.

The renovation project was supposed to be a weekend job, but he was either too busy, too tired or catching up with his family. After continuing to tell himself, "I'll do it next weekend", the painting didn't get started for 3 months after purchasing the property.

In the meantime, the property wasn't tenanted and this cost him approx $6,200 in lost rental repayments or $7,000 in excessive mortgage repayments (depending on whether it's a reno + hold or a reno + flip strategy).

Be realistic about your availability to get the job done. Work out how much time will be needed on the project (add 20% for the unknown). Ask yourself: "Do I really have this time available?"

Work out your break-even point. In the above example, it would only take about 2 - 2.5 weeks before it would be better to hire someone else to get the job done for you.

Remember - It's an investment, so it's all about the $$$.

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