After you renovate, sell or hold? A case study

With all the renovation shows on television there’s currently a lot of interest in buy, renovate and sell projects.  Here’s a real example of why would-be renovators should consider a buy, renovate and hold strategy rather than choosing to sell off their asset.

Property summary:

Location: Cremorne, Sydney

Property type: Three-bedroom, two-bathroom apartment 

A three bedroom apartment was purchased in Sydney’s North Shore in original condition. The property boasted Sydney Harbour views from the kitchen, lounge and dining rooms. 

The apartment was gutted with walls removed between the kitchen and dining and lounge rooms. This opened up the living space and increased the natural light in the apartment. A false ceiling and down lighting were added to the kitchen to define the space. 

Both bathrooms were gutted and redone from scratch. A brand new kitchen was installed complete with a washer/dryer in a cupboard, allowing the tenants to do their laundry without leaving the apartment. The renovation was completed with new paint, blinds and light fittings over a six week period. 

The numbers:

• Purchase price: $805,000
• Post renovation value: $1,025,000
• Total added equity: $220,000
• Renovation costs: $101,500 (includes project management fees and holding costs)
• Manufactured equity: $118,500
• Pre renovation rent: Estimated $675 per week (owner-occupied at time of purchase)
• Post renovation rent: $850 per week

After renovation the owner had the option to hold onto the property as an investment or sell the property and pocket any profit.  Both options are examined below using the figures from this real example.

Renovate and hold:

The benefits of holding onto this property after renovation are twofold.  Firstly, the increased equity of $118,500 can be used as security to borrow against to buy another property or invest elsewhere. 

Secondly this renovate and hold strategy example resulted in an increased rental rate of $175 per week.  This rental increase ($9,100 per annum) more than covers the interest cost of the funds required to undertake the renovation ($101,500 x 7% = $7,105 per annum). In this example the renovation increased the return on investment both in capital value and cashflow. 

It’s important to note that under a buy and hold strategy the purchasing costs are apportioned over the period the property is held and are only realised upon the sale of the property.

Renovate and sell:

Most people who undertake a buy, renovate and sell project complete the transaction within a 12-month period.  Therefore they receive no tax concessions on the profit unlike the owner who chooses to hold the property for more than 12 months. 

Under this strategy, the owner must account for the buying and selling costs as the asset is being realised with the major expenses in this example totalling $65,971 as outlined below:

• Marketing - $1,500 (web, signboard, floor plan, brochures)
• Selling fees - $22,550 (2.2%)
• Stamp duty - $41,921 

After costs the owner is left with a profit of $52,529 which is then taxed at their marginal tax rate resulting in a modest return for the work invested.

The final word:

The example above illustrates the difficulty in making a reasonable profit when undertaking a buy, renovate and sell project in comparison to the financial gain and flexibility provided under a buy, renovate and hold strategy. 

Patrick Bright is a real estate author and founder of Sydney-based buyer’s agency EPS Property Search. Bright has purchased over $500 million worth of real estate for clients. His best-selling titles include The Insider’s Guide to Buying Real Estate, The Insider’s Guide to Saving Thousands at Auction and The Insider’s Guide to Profitable Property Investing.  

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