Buying and renovating an investment property

COLUMN Deborah Carlyon

Finding your perfect home at the right price can be difficult. Often you are paying for the time, effort and money someone else has spent on a house. 
The tradition is to buy something modest to improve – a comfortable home that reflects your style and grows your equity. If your renovation adds more value to the house than the dollars it cost, you should be able to sell in a few years with enough extra money for a more expensive area or a bigger house. 
This is how most people have bought and sold houses, driven by changing life cycles – such as newly married working couples, painting and landscaping at the weekends and upgrading the kitchen and bathroom with the benefit of two incomes. Improving that first home provides a platform if they need to move, for example to a better area once children reach school age. Most renovations are designed for personal preference with a casual eye on future resale value. Homeowners have a pretty good handle on their local neighbourhood and what appeals to them is likely to appeal to others. When they move, the gains on selling a private family home are tax free and can be ploughed back into the next home. 
Buying to renovate as an investment property can be a different exercise. Tax could affect your return. If you buy a house, renovate it and live in it, there will usually not be any tax consequences when you eventually sell.
If individuals buy a house with the intention of resale or there is a regular pattern of buying and selling homes (even if they live in them), then this may be considered property speculation or dealing for tax purposes. In that case, any money made will be taxed as personal income in the year of sale. 
If you buy a second home as an investment, by definition you will be aiming to make money. If you buy to renovate with the intention of putting tenants in the house, the rental income is taxable but any gains on future sale are usually not. However, if you buy with the intention to sell as soon as the improvements are completed, you should factor tax into your budget. The taxable profit takes into account the purchase price of the house plus renovation costs, so keep good records.

              

Before you buy, ask a rental agent for an assessment of the house and talk about your renovation plans. The goal of improvements is usually to increase the rental income.  Creating an extra bedroom and bathroom is the most obvious way, especially in a central city flatting area where each bedroom in a villa could command at least $150 per week. That extra $7,800 annual rent could service new borrowings of $100,000.  Conversely, if your house is to appeal to a family, then an extra living space with indoor-outdoor flow to a nice garden and a garage should command more rent.
The best advice I have for landlords is to consider whether they would want to live in the house themselves. It can be a modest house but it needs to be clean, fresh and comfortable. If you upgrade the bathroom and kitchen, add insulation, a ventilation system and a lick of paint, it won’t be difficult to find good tenants.
Your investment property may be the tenants’ first home. If it is appealing to them it will also be popular with first homebuyers in the future if you ever get tired of being a landlord.

You might be interested in reading: Buying to renovate for investment – tax changes on the horizon.

This home renovation case study featured in issue 005 of Renovate Magazine. Renovate Magazine is an easy to use resource providing fresh inspiration and motivation at every turn of the page.

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