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What The Block doesn’t tell you about renovating - Part 1

Tuesday, August 02, 2016

DIY, it is in our DNA.  Trust Mitre10 to encapsulate the Kiwi spirit in six short words. True, we love a bit of DIY. Home improvement is invariably a national pastime which makes shows like The Block so popular. The appeal is simple, a couple of camera-ready youngsters chanced upon a pile of bricks, et violà! Ten episodes later, we have ourselves a Disney castle. Who doesn’t love a happy ending especially when there are sledgehammer and paint buckets involved?

In 2016, you would be naïve not to know that Reality TV is a far cry from Reality. While renovation shows are entirely inspirational, they are not at all educational. So before you quit your day job to become a professional renovator, know that there is so much more you should learn about renovating for serious profit than your weekly television appointments.

In this two-part article series, we share some fundamental but essential tips for your next renovation project. In Part 1 of the series, we will be focusing on preparatory steps that are designed to set you up for success.

Find your money first

A successful renovation job starts with buying the right property at the right price. It is all about being able to make quick and confident offers to clinch the right deal. At this point of the Auckland market that is very much a needle-in-a-haystack scenario. There are plenty of suitable deals out there for renovations, but it will take a bit of hunting to get to them. Since good deals are hard to come by, you will need to be in a position to act decisively at a drop of a hat. So when you do go through the trouble of finding these properties, don’t sabotage yourself by making weak and contingent offers because you haven’t got solid funding behind you.

You will also need to budget according to the scope of the project and make allowances for contingency funds. ‘About 80% of renovations in New Zealand run over budget. What is even more alarming is that half of those end up exceeding more than 50% of the original budget.’ says Mark Trafford, Director of Maintain To Profit. Getting the budget and contingency en pointe is a fine art and this is where experience shines through. If you are about to tackle your first renovation make sure you educate yourself on how to get the numbers just right. When you are confident with your numbers, source your money accordingly. The last thing you want is to suspend all work due to a lack of funds.

Choose your next renovation project correctly

Not every property is a candidate for improvement. You are renovating to make a profit, not a palace. "It all starts with choosing the right project." says Trafford. Take your time to study the market. Some pockets of Auckland are more suitable for renovations while others are just skirting too close to their value-ceilings for you to make any real substantial profit. Get an understanding of how sellable an area is. Databases like RPNZ give comprehensive information on the percentage of retail listings that sell and those that expire. They also report on monthly area inventory to give you an idea of how quickly a property churns over. Take the time to understand the area and its buyers so that you know what market you are catering for. You can execute a renovation perfectly but your efforts would be for naught if you are working in a stagnant or unpopular area.

Define project scope and schedule

A real life property rehab project is not as neat and tidy as a 10-episode reality TV programme. “There is no reason why every project can’t be completed to a set budget and on time. It all comes down to planning,” says Trafford. Without committing to a defined scope and schedule, these multi-step projects will end up being absolute nightmares for you as well as your contractors.

A realistic work schedule keeps you and your team accountable to the overall success of the project. Programmes like The Block don't discuss holding and opportunity costs.  Delays are the number one profit killer of a renovation project, not to mention that they dampen team morale.  Speak to your contractors and reach out the experienced renovators to set realistic timeframes for the entire project and individual tasks.

A project scope is a roadmap that takes you from the purchasing a property to quality renovation work through to extracting your expected profit. It is an organised list of tasks and objectives for your entire renovation that unites your team and allows everyone to execute their roles confidently for the final goal. Take the time to get this step right. If you are new to renovating, talk to skilled contracts and get a breakdown of work. Be disciplined and stick to your list. "Scope creep is a slippery slope that eats into your overall budget," says Trafford.

Next week, we will share tips on how to execute your renovation profitably. Can’t wait? Maintain To Profit is presenting at our upcoming seminar The 7 biggest mistakes investors make when renovating for profit on Thursday 1st September. This event is, of course, free for APIA members to attend and registration is open how!


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