It’s easy to become starry-eyed about a rundown property in need of renovation. But as an investor, those ‘renovate or detonate’ properties can offer traps for the unwary.
Check out the four major pitfalls to see if restoring a renovator’s delight is the ideal project for you as an investor.
1. Consider the tax man’s rules
The Tax Office allows generous concessions for landlords but many only apply if the property is tenanted or available for rent. You cannot normally claim loan interest and other property running costs if the property is vacant during a major refurbishment.
2. Know when a repair is a replacement
Repairs made either to get a property ready for tenanting, or while a tenant is in place, cannot always be written off on tax immediately. The Tax Office makes it very clear that replacing a major item with a new equivalent is not a repair but rather a capital improvement. In this case the cost may need to be depreciated rather than claimed on tax immediately.
The key take out is to speak with your tax expert. Get things wrong with the Tax Office and you could face unexpected extra tax and penalty interest.
3. How’s your cash flow?
If you have the cash on hand to complete a renovation, consider whether the money could be better spent on a property that can be tenanted from day one. Property improvements can take longer than expected, and you need to be sure your cash flow can handle the cost of the project without the benefit of rental income.
4. Talk to your lender
As part of the loan approval process, your bank will likely want to conduct a valuation of the property you plan to buy.
This can be an important safeguard as it will let you know if you’re paying above the odds for a place.
The downside is that a very rundown home may receive a poor valuation. Unless you can show you have funds available to complete a decent renovation, the loan could be knocked back.
Speak with your ME Mobile Banker for tailored advice on the pros and cons of investing in a doer-upper.