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Reno Focus: Unlock Equity

If you’re looking to build a healthy nest egg for your future, then investing in property can be a fantastic way to make a profit. Securing a property that requires some improvement, in the right location, could be your fast-ticket route to building a property portfolio in as little as five years.

The secret to this property fast-track is a strategic renovation. A renovation is an excellent way to increase the value of a property at a faster rate than by simply hoping and praying that the market will naturally grow.

So, what do you do with your property after your renovation is complete? Well, you leverage it to fund your future property investments.

I saved $45,000 for my first deposit and used equity created through my renovations to fund the deposit, buying costs and renovations for every subsequent property. Knowing your long-term goals is essential and should be determined even before you choose the suburb you want to invest in, because picking the right location will help ensure your renovation dollars are well spent.

Here, I explain my tips for making sure that you get the most out of your completed renovation and boost that equity number as high as possible.

Step one: Take stock of what you did

So your renovation is finally finished! Your blood, sweat and tears were poured into your project and you should be really proud. Now, the next step is to grab a notebook and take stock of every single improvement you made to the property.

Walk through the property and list the changes you made. Nothing is too big or too small to note down, as you will use this information to prepare an official valuation document. This will be your key to determining how much value you have added to the property. The specifi c details of the property itself, the completed renovation and the comparable sales are just some of the main things you need to include in this document, and they give you an objective perspective.

Top tip

I have included a valuation template in my course, The Ultimate Guide to Renovation. So often I see a great renovation but then when I look at the valuation the numbers just don’t match up. Renovation is only half of the process of creating equity – you must follow through and make it as easy as possible for the valuer to see the dollar value in your improvements, otherwise you could find that you’re not much better off than when you started.

Step two: Book your valuation

Speak to your broker about organising an official valuation to determine exactly how much equity you have created and how much you can access. You may find that you are able to pull this equity out straight away to fund your next project.

You want the valuer to walk through and see the changes that have been made, rather than simply doing a curbside valuation – after all, this will not reflect the amazing renovation you have done.

Remember, the valuer will know the area (usually) and already have a figure in mind for how much your property is worth, simply based on the address and rough features. So they are not going to know what has gone on behind doors if they don’t go inside.

Top tip

A valuation typically costs between $300 and $600, and your broker may suggest that you pay for it yourself. If you hire your own valuer, you have more input. Your broker can assist you in selecting which valuer you should hire. After all, if you use the same valuer that your lender uses, you might find that you are locked into a disappointing result, and you want the valuation to reflect the best of your hard work.

Tax tip

The cost of hiring a valuer for an investment property could be a tax-deductible expense, so be sure to hand the invoice over to your accountant at the end of the financial year.

Step three: Get the right valuation

Bank valuation systems are automatic. Once a valuation is ordered, a company is sent a notice to conduct a valuation.

If your loan-to-value ratio is below 80%, there is generally little risk to the lender that property values will drop by 20% and leave them with a mortgage higher than the value. Therefore, they don’t require a full valuation, and the valuer will more than likely just do a drive-by or a desktop valuation.

However, these types of valuations do not indicate that any renovation has taken place. At most, the effect of the renovation is minimised.

You need to insist on a full valuation that explores all aspects of the home and allows you to bring to light all the changes that can conceivably increase your property’s appeal.

Top tip

Prior to a valuation, I prefer to have professional real estate photographs taken, even if my strategy is renovating to rent. Hiring a professional photographer can cost as little as $150 and gives me professional images that I can use for the valuation document. Photographs also help market the property to quality would-be tenants. There are several photography services available out there that provide reasonable rates and packages – the important thing is to know how you want the photographs to look.

Step four: Ready your property for valuation

Staging is another thing you need to think about before a valuation. It’s been consistently shown that houses staged with rental furniture sell and, I believe, also achieve far higher valuations than those that aren’t furnished.

We typically linger longer when inspecting a property that is furnished compared to one that is empty, because there is a lot more to see and experience. You are essentially creating a scene and atmosphere, and it’s crucial to present the property to a valuer in its best possible light.

Staging can be done for under $5,000, and it doesn’t have to be limited to property sales. Even when renovating to rent I would consider staging a property, because you can then retain the furniture you hired for the rental opens. This can attract more potential tenants.