Can you still make money doing up a property to resell?
The once-popular strategy of purchasing properties for renovation and resale is facing headwinds, according to recent data and expert analysis. A shift in buyer preferences, coupled with fluctuating renovation costs and evolving lending practices, is impacting the potential for profit in the “fixer-upper” market.
Shifting Buyer Preferences
Trade Me data reveals a clear trend: buyers are increasingly prioritizing move-in ready homes. A survey of 2200 active buyers found that 49% are seeking properties that feel new or updated, and 16% specifically want new builds. Only 6% are actively looking for fixer-uppers, and just 15% are interested in original-condition homes. This suggests the “DIY dream” is waning, as buyers prefer to avoid the uncertainties and costs associated with renovations.
Renovation Value: A Mixed Outlook
Experts disagree on the financial returns achievable through renovations. Nick Goodall, head of research at Cotality, formerly Corelogic, indicates that a substantial renovation – including double-glazing windows and modernizing kitchens and bathrooms – might increase a property’s value by 4% to 5%. However, this figure applies to comprehensive overhauls, not simply cosmetic updates.
Some believe the primary motivation for renovations, particularly for owner-occupiers, isn’t purely financial. Goodall notes that many buyers undertake renovations to enhance their living experience rather than solely to maximize resale value. Investors, on the other hand, are more likely to focus on renovations that improve rental income, such as adding bathrooms to increase property capacity.
The New Build Alternative
The attractiveness of new builds is also growing. The gap between the cost of building and purchasing an existing home has narrowed as construction cost growth has slowed. Furthermore, lending restrictions are less stringent for new builds, with exemptions for Loan to Value (LVR) and Debt-to-Income (DTI) ratios. This makes new construction a more accessible option for many first-home buyers, particularly in areas like Auckland where townhouses are prevalent.
Potential for Return Remains, But Requires Strategy
While a 5% value increase may be a realistic expectation for a full renovation, some investors believe higher returns are possible. Property investment coach Steve Goodey suggests that focusing on cosmetic work, combined with securing a discount on the initial purchase price, can yield a 20% overall return. However, he cautions that structural work like roof replacement doesn’t necessarily add value, as these features are generally expected.
Ed McKnight, an economist at Opes Partners, suggests that a more aggressive return on investment – aiming for a $2 increase in value for every $1 spent on renovations – is a reasonable goal for experienced investors. This would involve substantial upgrades, including kitchen and bathroom renovations, repainting, and potentially repurposing rooms.
Frequently Asked Questions
What percentage of buyers are looking for a property that is already updated?
According to Trade Me’s survey, 49% of active buyers are looking for a house that already feels new or updated.
What level of renovation is needed to see a potential value increase?
Nick Goodall of Cotality indicates that a material increase in value, around 4% to 5%, requires a full renovation, including double-glazing windows and modernizing core areas like bathrooms and kitchens.
Are there lending advantages to buying a new build?
Yes, lending restrictions are less strict for new builds. Buyers do not have to adhere to LVR restrictions, and DTI exemptions may also apply.
As buyer preferences evolve and market conditions shift, the profitability of property renovation requires careful consideration and a strategic approach. Will the trend toward move-in ready homes continue to dominate the market, or will opportunities for savvy renovators persist?