Month: April 2020

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You can be your own builder!

April 25, 2020 | Uncategorized | No Comments

When planning any house renovation project, you need to be courageous. While it is wonderful to breathe new life into an old home, it can be a challenge and while you can Do It Yourself, it is advisable to have a ‘guardian angel’ or development manager or facilitator like Blue Quadrant, with experience assisting you along the way.

Nevertheless, whatever option you choose – it can be extremely rewarding. Where house prices are above one’s reach, renovating could be the best way to get into that market. From an investor perspective renovation if astutely accomplished adds significant value and an obvious return on investment.

However, before eagerness gets the better of you, make sure you have prepared for the renovation in advance, considering everything from the start as this will make the whole process run more smoothly and help you budget for final house renovation costs more accurately.

This document focuses on people who have a home to renovate, but if one is looking for a home these five (5) suggestions should be considered. One does not want to end up overcapitalising.

  1. Location – is this the worst (or close to) house in best street.
  2. Buy astutely – do not pay above market value.
  3. House inspection – ensure the building is structurally sound and there are no destructive pests.
  4. Check whether renovation can be carried out – Is there scope to extend and are planned changes likely to be approved?
  5. Budget – Are high-level cost of this refurbishment feasible?

Starting the Renovation Process

Before taking on the property, one should thoroughly research house designs and renovation costs to check that the project is financially viable, but once you have taken possession, have a good look around and properly assess the extent of the works, so you can get a detailed financial schedule in place.

Some mortgage lenders will help one fund the renovation project and offer the money in staged payments. It is therefore mandatory to decide exactly how much one has to spend.

RULE 1 – Formulate the budget and stick to it.

Get quotes from the various contractors. It is also advisable, however, to have a contingency of 10–15 per cent for each contractor to allow for the unexpected expenses that can arise when renovating. Furthermore, weather conditions also impact causing delays and therefore this contingency ensures one’s budget remains realistic.

RULE 2 – Be clear about what you hoping to achieve, because if one deviates it adds to additional costs and time.

If you are deciding just how to transform your home within your budget, seek the assistance of a designer, architect and engineer in the case of moving walls.

RULE 3 – Check for Council or other restrictions

It is an illegal offence to carry out certain unauthorised works to a dwelling. One cannot for example knock down a heritage listed property.

Once you have your plans, you must identify which aspects of your proposed renovation require statutory consent. Find out how to apply for planning permission.

Too many people rush their designs and are regretful afterwards. It is worth taking one’s time to perfect the design and ensure the finished property will meet ones needs. Think carefully about room placement, too and natural light.

RULE 4 – Do not rush the design phase.

Once one is happy with the design, a schedule of works needs to be drafted. This is a crucial step. Be clear on the steps you will need take to renovate the property before you make a start, and prioritise the more important works, that is those that say stop further decay or stabilise the structure. The schedule of works lists the order of jobs – so for instance, re-wiring must be completed before walls are replastered or in the case of a bathroom renovation waterproofing needs to be completed before tiles are laid.

RULE 5 – consider your team

Use recommendations from family and friends that are familiar with how to renovate a house as they can offer help in finding an architect, builder and, if needed, a project or development manager – unless you are planning to be the renovation’s project manager yourself.

It is imperative that one has to feel comfortable and confident in the skills of everyone working on the property.

Extensive building works are not be covered by standard building insurance. It is worth noting that standard insurance policies only cover an inhabited house, so if you plan to move out while the work is carried out, make sure your insurance company knows. The best thing to do is to take out specialist renovations insurance. The level required will depend on the quantum of works carried out.

If one is outsourcing the project to a builder or development manager, check that one’s contractor has the necessary work cover insurance and public liability insurance. If the unenviable happens, not being insured will have a major impact on your project.

Simply insuring a home while it is being renovated is not enough — you must ensure the property is adequately protected against break-ins, too.

Living next door to a building site can be extremely stressful and if one continues to live in the house post renovation works, it is advisable to discuss the refurbishment with neighbours beforehand.

The Building Process

This part of the renovation usually starts with preparation and with larger projects foundations and drainage.

Damp-proof measures and new insulation will be incorporated at this stage and any existing damp issues can be sorted out. Always get an independent expert to take a look at any damp issues that may arise and advise on the right solution. Waterproofing may be ideal for modern homes, but can do more harm than good in a solid-walled period property.

If one is building a second storey to a house, where part of the roof is dislodged, it is important to speedily get the property suitably weathertight because so many subsequent stages may follow such as plastering, electrics, joinery and painting. Getting the roof coverings on, with all of the associated flashings and weather seals, is vital. Fitting doors and windows is also a huge step forward.

If one is changing the internal layout of the property, this is the stage where stud walls will be built and windows and doors incorporated. Walls and ceilings can then be plastered,

If kitchens and bathrooms are being renovated or added to the home, plumbing and electricity play an important role. Appliances, worktops, taps and other accessories need to be acquired and delivered to the site.

The next stage involves finishes. Where we had heavy and rough work at the earlier stages are transformed. The colour schemes chosen depends on whether this is a home for life or an investment project.

It is good practice to ensure that each tradie do what they can to keep their work area tidy, but it is expected that there will be a certain amount of shared mess that nobody takes responsibility for. The owner or the development manager will sweep up and have a quick tidy at the end of each day to make sure that tradespeople who come in to start new jobs the following day are not being held up.

In summary, there are savings to be had in doing the renovation or build oneself, but as the table indicates the best option is to bring on board a development manager or facilitator who will be one’s ‘guide’, so one does not experience major pitfalls along the way.

 

 

Hypothetical Refurbishment Options
 Base CostContingenciesOverheadsProfitTOTAL
Larger Company50% – $90,00010% – $9,00015% – $13,50025% – $22,500100%- $135,000
Small Builder55% – $80,00012% – $9,6003% – $2,40030% – $24,000100% – $116,000
Owner Builder (DIY)72.5% – $85,00025% – $21,2502.5% – $2,1250% – $0100% – $108,375
Development Manager83%$70,0007%$4,90010%$7,0000%$0100%$81,900

Note:

  1. Larger Companies are low risk, but job owner is one amongst many customers. Completion time is generally longer. Invariably use same contractors as small builder. Overheads high due to head office costs.
  2. Small Builder is cheaper option than Larger Company, but high risk as standards are not as high (see contingency). Build margin in labour and products used.
  3. Owner Builder (DIY) think they can do it cheaper than most, but invariably there is a cost blowout. They do not have turnover relationships with various contractors and usually pay ‘retail’ prices. Due to inexperience, mistakes are made and tasks have to be repeated adding to time and costs.
  4. Development Manager or Facilitator keeps the builder or various contractors honest and understands the build process. They also know where to source product cheaply and margins for product greatly reduced. Risks are mitigated and the job is usually completed on time and within budget.

There is a school of thought that property is a long-term investment. There are others who believe that timing is the key element to either investing or divesting of real estate. While there is some truth to both these propositions, this article will demonstrate that one could invest in any market, but with the qualification that the property should ‘actively’ be managed to realise its true potential. More importantly one should fully come to terms with their investment decision making process and not simply invest or divest because it is the trend. In other words, become a leader in terms of what you wish to achieve, not be a laggard that follows what others are undertaking.

In 2015, everyone in Sydney was buying residential property. It was common knowledge that if one was missing out if one waited. House prices prospered and loans flowed and many people generally made money. However, there was a blip between 2016 and 2018, where prices came back, but after July 2019 it blossomed again until literally two weeks ago when the music stopped. Government measures to halt the Covid-19 virus has had a profound effect in halting the virus spread, but it stopped the economy and indirectly property in its tracks.

Now in April 2020, the economic malaise is starting to impact and some people are anxiously looking for help from their lending institutions or ordering real estate agents to sell their homes. With so many people out of work, ‘mortgage in possession sales’ are starting to occur in the market place and the great real estate boom of 2015 and late 2019 looks more like a ‘flicker of the candle’ and many believe the downturn has hit the accelerator pedal.
In order to fully understand the Covid-19 impact, the following example should give the reader an idea how the market has ground to a halt. In Rose Bay a suburb of Sydney, a home in Farraday Avenue sold in early March ’20 for nearly $7 million, well above the reserve price. Exactly, three weeks later in the same enclave enquiry level for similar properties have stalled and houses are not selling even at a major discount to their asking price. Supply of property for sale is starting to outpace demand and prices are beginning to fall again.

So, what do you do at this stage of a falling cycle? The question is, is this the right time to buy, or sell; should we be waiting for a further fall, if it does fall more?

Most will state that one should wait, yet with Covid-19 cases ‘flattening’ across the NSW region and a share market resurrection, the bottom of the market may not be that far away and the market may react quickly with people being re-employed coming out of their ‘lockdown environment’ and beginning to spend.

However, adopting a conservative standpoint, when we talk of a ‘soft’ economic market, we are typically referring to effective wage rates remaining static or falling and unemployment growing. With this in mind, it should be obvious to the reader that some people will not be able to afford their repayments and the possibilities of an overall recession occurring is then relatively high.

In the event of a protracted recession the situation plays into every investors dream. However, if one invests too early and the market falls further, one may have missed the opportunity to increase one’s return. However, this where the astute, well researched investor comes into play. While timing plays a part, it is what added value they can extract from the investment that at the end of the day will benefit them. To do this, they need to consider all the facts including several market factors (including supply/demand pipeline and market performance indices), strategies and possibilities.

Sadly, there is a history of ‘buy’ or ‘sell’ laggards waiting for the market to stabilise which will give them the impetus to invest or divest and yet with a rapid correction in the market, they may find they have missed out as they have acted too late.

The important point is understanding why they are actually afraid to buy or sell now and miss out later. There is an important economic term traditional, property advisers give that they believe should become part of one’s investment vocabulary or divestment strategy and it is called ‘opportunity cost’.

Opportunity cost is an economic term that refers to the price you pay to miss out on one option when one commits to another. In this case, buying Property A can be a problem if you miss out on Property B. If Property B ends up being better (one bought it after the market crashed and paid less), the opportunity cost would be the money one lost that one could have made if one had waited for Property B.

This anxiety resulting from the unknown holds a lot of investors or sellers back, hence the laggard mentality. So how does one beat it? We at Blue Quadrant call this from a buyer’s perspective the BRAG approach. Buy, Refurbish, Asset Manage and Gain approach. From the seller’s standpoint the acronym we use is SWIM. Sell, Wait, Invest, Manage. For us while timing is an advantage, our focus is to ensure there is benefit, whether it be return on investment for investors. Please note, while we act for owner occupiers, we still believe every buyer should consider the buy or sell decision as an investment.

Let us touch on the SWIM (Sell) approach first then focus on the BRAG (Buy) approach later in this article. A person will sell if there is an urgent economic need to do so or simply to get out with the intention of maybe buying well later. The latter is usually the approach adopted by astute investors. If one relied on some of the latest press coverage the market in Australia is only now beginning to fall and so the tactic is simply to successfully sell while there are still buyers in the marketplace; then astutely reinvest when the time is ‘right’, or more importantly when a healthy return on investment can be realised. Most importantly, whether one holds the property for a short or long period of time, it is imperative that one actively manages the investment in line with one’s investment decision making.

We at Blue Quadrant advised one of our investor clients to sell their townhouse comprising three bedrooms, two bathrooms on the Upper North Shore in early 2016, given that there was not much value upside that we could extract from the property. Furthermore, the market was peaking and we had a purchaser prepared to pay $1.8 million for it. A year later on our advice our investor bought a four bedroom; two-bathroom house, with pool in the same area and with a higher rental rate for $1.625 million.

Another owner occupier we advise had intimated to us they wished to move from the North Shore to the Eastern Suburbs of Sydney. Interestingly, at the time we had a buyer for their four-bedroom, property who were willing to pay $2.1 million, but timing was an issue as they had a daughter in her final year of school. Their main aim was to ‘downsize’ and relocate to the Eastern Suburbs and buy something cheaper so that they could place money away as they were close to retirement.

If they had sold then in the height of the market, they would have had to pay the equivalent of $1.85 to $1.9 million in the Eastern Suburbs for a comfortable, renovated semi-detached home or $1.65 million for a 2/3 bedroom ground floor apartment. In essence if they transacted then they would have been able to place approximately $200,000 in the bank.

In 2018 they appointed an agent to sell their home, but with no positioning strategy the house failed to sell for 16 months in a flat market and the best offer made was less than $1.8 million. Realising they needed astute advice, they approached Blue Quadrant and were told that the reason the house did not sell was because there was no front door. One had to walk to the rear of the property to gain entry via the kitchen. At a cost of $3,500 a front door was introduced and some minor repairs to an internal beam undertaken. We at Blue Quadrant appointed and supervised an agent who then launched the property when supply had dramatically fallen and in a depressed market sold the property for $1.905 million. While this was a $200,000 drop on the previous offer made, we were able to acquire a semi in Randwick for a low $1.4 million and with $100,000 in renovation costs provide these purchasers with an asset which in today’s market would be valued in the vicinity of $1.925 million. The net effective gain as a result of our involvement in a down market has been $400,000.

This shows the impact of what can be achieved even if the market is down. By taking a lead position in what can only be described as a poor market, the purchasers came out on top. Proactive advice by Blue Quadrant personnel ensured that selling low could be countered by buying well and improving the asset and as result a positive outcome was realised.

From a buy perspective, the approach is fairly straight forward. There is some risk in the short-term, but if one does their homework the value will increment over time. The caveat to this is that one buys, courtesy of them knowing what they are doing or being assisted by a capable and professional buy agent or consultant.
This often ends up resulting in a hefty growth in capital value or the production of a cash-flowing property. Let us once again consider an investor of ours who acquired a property in St. Ives below the market price. The owners wanted $1.45 million and we secured the home on their behalf for $1.22 million. Surprisingly, the market was buoyant, but the property did not present well, both in terms of layout and size with only three bedrooms and a bathroom did not appeal to the market who were looking for a minimum four-bedroom, two-bathroom home. Our team came up with a clever solution, which transformed the entrance hall into an ensuite for the adjacent main bedroom and turned the large laundry into the open planned kitchen and as a result the original kitchen became an additional bedroom. One of the linen cupboards became the new laundry equipped with a small basin, part cupboard and enough room for a washing machine and dryer. The total cost for the refurbishment was $97,000.

The Asset Management approach adopted courtesy of our research and feasibility study reviewed both economic and demographic data and it’s bearing on the property market. The strategy adopted was to rent out the home for a year at premium and then dispose of it. The house was sold for $1.7 million with a gain of $380,000 taking into account other holding costs. The original deposit was 20% or $244,000, which shows a return on equity of over 100%.
In this particular case, we put paid to the theory that property investment should be for a long period of time. If an investor had bought the home across the road at say $1.22 million in a market in which long-term capital value growth rate was 5.3%, it would have taken another 7.5 years to achieve the same return.

How is this possible? When you buy a house in a conventional way, one puts down a deposit, then includes money for stamp duty costs and then one waits for the property to gain in value.

It is our firm belief that there are always opportunities in a good or bad market, but what is required is detailed research, strategy and the astute eye for repositioning of the asset to meet market.

Let us look at one more example that further substantiates taking advantage of the opportunity and most importantly not being traditional or passive, whether you are an owner or investor.

An investor we know and have advised, bought a 1960’s three-bedroom apartment in a sorry state in January 2019 for $918,000. It had been rented out for many years and needed an uplift. $52,000 was spent on a new kitchen, bathroom, and carpets and window coverings were replaced. Most importantly, part of the two bedrooms were converted into a study or small third bedroom. At a loan-to-value ratio of 70%, the full commitment was $295,500 (rounded). It was subsequently appraised and refinanced by a new lender at a loan to value ratio of 80% at $1,160,000. The beauty of this is that the investor pulled out $50,000 of his original capital invested and yet still had enough equity in the deal to remain in control. Because the property presented well and the possibility of procuring tenants was easier, they were able to secure a more attractive interest rate and terms. Most importantly, they gained an additional $185 per week or nearly $10,000 more in rental and had gained a refurbished asset which would not require extensive maintenance for a few years and could be sold easily if the need did arise. In a traditional sense if one’s property produces positive cash flows (brings in more income than it costs to own) and capital value is increased and gaining tenants is not an issue, then all is swell.

We at Blue Quadrant fervently believe there are always buyers in good or bad markets. Most importantly is how one realises the ‘highest and best use’ for a property. If the market is about families, then a two-bedroom house or apartment may not suffice. I am a firm believer in the old adage of buying the worst to average house in the best street and uplifting to meet market expectations.

While no one has a crystal ball and can tell where the market will fall or rise, there are some standard processes as demonstrated above that one can use to hedge one’s bet in any market and grow your wealth over time. Our message is simple – do not sit on your hands and wait to buy real estate, buy real estate when the opportunity is staring you in the face! If you need our help, we are always willing to please.

 

Most people deal with a solitary bank without ‘shopping around’. A smaller percentage may visit two or three financial institutions to get the better financial deal and while this maybe a step in the right direction, it might have some risks.

The advent of mortgage brokers has meant greater choice and in recent times with tougher regulations more befitting and often less risky financial arrangements.

A Mortgage Broker offers the service of being the sole point of contact for arranging your finance requirements for a property purchase or refinance.

The process normally includes the following:

  • Discussing your financial situation and assessing your requirement(s).
  • Considering the appropriateness of lenders to meet your needs including the matching of a loan solution, including product mix and features to your requirements.
  • Preparing an analysis of all the purchase costs and the loan repayments including alternatives eg. Variable vs. fixed, principal and interest vs. interest only.
  • Preparing the Application and submission thereof with the relevant supporting documentation required by the lender.
  • Arranging a pre-approval in a situation where a suitable property has not yet been sourced.
  • For First Home Buyers preparing and submitting the First Home Owners Grant Application.

In this way at a ‘high level’ a better product can be sourced at a lower cost, often with less risk.

More specifically, the benefits of using a Mortgage Broker include the following:

  1. A Mortgage brokers experience and knowledge should save you time and money (lower repayments and lower establishment, ongoing and exit fees).
  2. Professional mortgage brokers use software which updates them with all the information on lenders products, including interest rates, loan establishment and ongoing costs and features. The software normally has all the lenders servicing calculators so it enables the broker to evaluate how much each lender will lend in the clients’ circumstances.
  3. A competent mortgage broker will normally offer you various options and products and compare them for you. Features include offset accounts, repayment holiday, internet access, credit cards etc.
  4. Most mortgage brokers should have access to hundreds of products including most major & 2nd tier lenders including Adelaide Bank, AMP, ANZ, Bank SA, BankWest, CBA, Home loans Limited, HomeSide Lending, ING, NAB, St George, Suncorp & Westpac.
  5. An honest broker with integrity will choose the loan package that best suits the client rather than the one that pays the highest commission. If the broker follows this mantra and has a long term business approach he will receive more referrals and should be more successful in the long term.
  6. The lender pays the mortgage broker on settlement of the loan and in most cases an ongoing trailing fee. In most circumstances the client is not charged a fee by the mortgage broker.
  7. As the Mortgage Broker is writing many loans and is aware of the current circumstances in the lending market, he/she is aware of which lenders are looking to increase their market share and will be prepared to negotiate better interest rates and terms to win the business.
  8. A mortgage broker should be aware of the banks criteria and therefore assist you in efficiently obtaining a loan whereas if you apply directly you may be declined because of your limited knowledge & experience.
  9. The mortgage broker understands the process and timing and knows what the lender requirements are and what the client is required to do throughout the process.
  10. An experienced mortgage broker understands the risks that the client is taking by their actions, eg paying a holding deposit, exchanging contracts, buying at auction, buying without cooling off etc.
  11. A broker should be able to assist with current Stamp Duty concessions, queries and exemptions, the legislation is always changing depending on government policy & the economic climate
  12. Many mortgage brokers will be happy to meet you after hours and at a place of your choice be it home, work, or other locations.

In summary, Mortgage Brokers bring choice and hopefully ‘a better deal’. Before you commit to a Broker make sure of the following:

  1. The mortgage broker and his business should be accredited with an Association such as the Mortgage Finance Association of Australia (MFAA) or Finance Brokers Association of Australia (FBAA).
  2. The Broker is a Member of a Dispute Resolution Body such as Credit Ombudsman Service Limited (COSL).
  3. The mortgage brokers have Professional Indemnity Insurance.
  4. The Broker is accredited with a lender.
  5. They have the necessary competence and experience.

Article Written by Paul Rabie of Rabie Finance

Paul is a Chartered Accountant by background and is a member of the Institute of Chartered Accountants in Australia. He has 14 years experience in lending and established his own Mortgage Broking business 6 years ago and has arranged both residential & commercial funding for numerous clients. Rabie Finance is a member of the MFAA and COSL.