It’s Saturday afternoon and you’ve just met your soulmate. You’ve fallen for the wide patio with original floorboards or wrought-iron on a bull-nose verandah. Maybe the Art Deco mouldings or pretty weatherboards a little past their prime have set your heart on fire. With some work, it could be the perfect investment. Right?
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 be riddled with traps.
Being prepared is half the battle won. Before you drop a deposit on a potential money pit, check out the four major challenges of restoring an older home.
1- Be real: is this a good investment?
Falling in love with a property feels pretty nice, but that feeling can be tricky to hold on to when you’re painting at 1am and the roof is leaking. This isn’t your family home, so you need to ask some hard questions. Why do you want to renovate? Is this a sound financial decision? Is renovating a rental property going to offer the best return? Is “we love it” a good enough reason to invest so much time, money and hard work?
2 - Consider the tax man’s rules.
The Tax Office allows generous concessions for landlords but they many only apply if the property is tenanted or available for rent. Generally speaking, you can’t claim loan interest and other property running costs while the property is vacant during a major refurbishment. While you may be eligible for tax deductions on investment property, if things don’t go to plan you could be liable for substantial extra cash.
3 - Know when a repair is a replacement.
The Tax Office is very clear that replacing a major item with a new equivalent is a capital improvement, not a repair. That means repairs, whether they’re to get a property ready to be leased or while a tenant is in place, can’t always be written off on tax immediately. In this case the cost may need to be depreciated, which can mean carrying more costs for a longer period.
Always speak with your tax expert before starting a renovation project. Get this part wrong and you could face unexpected extra tax and penalty interest.
4 - Plan to spend more than you expect.
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 are prone to budget blowouts – especially in older properties. You need to be sure your cash flow can handle any unexpected costs while the property is untenanted, as you will still need to pay your mortgage.
That turnkey apartment down the road might not tug on your heart strings, but it could be a better financial investment.
5 – Your vendor can help you plan.
Unlike properties where everything’s been done, fixer-uppers can be hard to value. As part of your loan approval process, your bank will likely want to conduct a valuation of your potential investment, to make sure you’re not paying too much and that the risk to you is minimised. A home in poor condition might receive a poor valuation, which could mean you’re not offered a loan.
Your ME Mobile Banker can help you to understand what’s involved in securing finance for an investment property. They can offer tailored advice for your situation, including funding, what to expect from the project, and how to improve your chance of success.
This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.