Using a Black and White palette, see our general guide to buying property for value, renovating and the potential tax consequences.
Buying a new property definitely has its lifestyle benefits as everything is brand new, there are also those additional tax benefits associated with depreciating almost everything. Usually, there is less maintenance if your builder has completed the property properly.
What is wrong however with buying the worst property in the best area that you can afford? Do you always need to keep up with the Jones’s and have brand new or fresh everything immediately?
Buying the worst property in your best area is amazing for the buyer as they have the most upside opportunity to add more value to their property, while at the same time customising the property to their own liking. The main principle behind buying property for value is simple, it’s about buying something that you can add value to. The flipside to this notion is buying the property for lifestyle purposes only but we’re focusing here on making money from the property.
When looking at a property that you’re looking to add value to, you need to ask yourself these questions. Can you knock out walls, change floors, doors, bathrooms, laundry, add decks, pergolas, skirting, cornices, painting or carpet? Will Bunnings become your new second home? Will this property you’re about to buy allow you to roll those sleeves up and get your “Block” on?
You still have access to the same open area, the same schools, transport, parks and shops that Mr Smith may have paid 150k more for last month. If we apply the human perspective we need to be able to envisage someone else wanting to enjoy the same amenities in the targeted area. If you can picture a few different demographic types enjoying the location, then you’re probably onto a winner and you’ve had the lowest entry point into the same location that someone else may have paid much more for.
Adding levels, bedrooms, studies or a granny flat can be fun and of course, will add significant value. Architect George Bouropoulos, Director of Arch Media Solutions has successfully lodged a few DA’s (Development Applications) in his lifetime for these structural changes. “You need to understand that councils can delay the approval process so you need to know where to start and what they’re comfortable with. We’ve had clients come to us after yearly battles that we’ve been able to sort in a month or two”.
The council approval is vital also for banks who will want the structural changes approved when they as a lender will be holding this property as security. If you’re paying cash for the property, then who cares what the lender thinks but I don’t think too many of us are in that position. The DA approval is also important for the next buyer doing their own due diligence on your property you’re trying to sell.
Veeva Property Group principal Glady’s Mallqui, is an expert at not only renovating for her clients before selling, but also at decorating properties. “You must do three things simultaneously when attempting a renovation. Plan your budget with a buffer, outline your critical path forward and importantly, visualise”. Gladys has had more than 20 years of experience and see’s many missing these key elements. It’s vital also to use the services of tradies that you can get a reliable review on or feedback for. Do your homework by getting a few quotes, in Sydney particularly as costs have risen.
The tax man aka the ATO will allow you to claim a deduction for any of these expenses associated with the renovation if they’re done to a property that you rent out. This is your property that you’re treating as an investment and not living in for owner occupier purposes. Daniel Chiha from Kelly Partners shared his expertise. “Property owners usually underestimate the benefits renovations and structural changes (capital works) can have. Especially those renovations, not only do they improve the property value but allow you to claim each and every dollar spent on improving the property that generates income for you”.
To sum it up, buy a property whether for investment or owner occupied purposes in a location you can add value to. Ensure it's somewhere other people from different demographics would want to live, claim the deductions and enjoy the journey. Then, when the time is right, get the bank or lender to value this property that’s now shimmering to unlock the additional value that you can borrow against to do it all over again – building wealth.
Please don't hesitate to contact me if you wish to discuss the above general guidance in more detail and please do let me know your thoughts on the content. I'd love to know what you think.
Peter Vassilis
Black and White Finance