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The Most Profitable Renovation Strategy · The Follio Property Podcast

• 0:06
  Welcome to I Call Bullshit, the property podcast, where we separate real estate fact from fiction. I'm Rhys Bettle, and every episode, we uncover the truth behind the property market's biggest claims and trends. Went against the trend there, Lockie, and did the intro after you told me not to.
• 0:21
  I just think people at home have got better things to do than listen to your intro. Joining me is our resident expert, Lachlan Delhunte. Today, something that's pretty close to what we do, and we do get a lot of comments on this from customers, people now that are watching the podcast, statement today is passive investment is lazy investment. So what I wanted to talk about today with you, Lachlan, particularly on value adds, some property development, I should say, as well. Great conversation, Rhys. Yeah.
• 0:50
  No, it is. It's really topical because I don't want to go out there and say, answer the question, is passive investment lazy investment? But I think it is. And there's a lot of firms and I think that's become the art of the buyer's agent investment advisor wave that we're seeing at the moment is all around these passive holds.
• 1:13
  And it's, you know, we had Cal Doggett on an episode and seeing him talk to the value add in the commercial space. But equally, it's as important in the residential space as it is, I think, from a point of making sure you de-risk the asset, not just relying on market uplift is really, really important. But you can also accelerate your equity and accelerate the growth of the property. Yep. When do you think someone should be looking...
• 1:41
  at that value add or maybe some development. Is that the initial acquisition of the asset? Should they be planning this strategy beforehand? I know we said passive investment is lazy, or is there a potential that you sit and hold on it for a bit before you start looking to add extra value to the property?
• 1:59
  I think it's got to be at the forefront of every acquisition. And certainly us as a business, we've always been value-add first. Again, we're preserving the downside risk. So if our economist, if our research falters or is incorrect at any point in time,
• 2:17
  then we know we're going to be in front from day one because we can generate uplift in that property if the market goes up, backwards or sideways. And we've done that through development. We've done that through floor plan reconfigurations. We've done that through modest renovations. And we've done that through adding ancillary improvements. And then in commercial space, as we discussed previously, trying to find things that you can manifest growth through changing the use of the property.
• 2:44
  So there's various ways that you can do it. But the reason you do it is yes, you want to accelerate your uplift. But most importantly, you want to protect your downside risk. That wasn't your question. It's interesting though, like in terms of, you know, some of the things you said there that you can actually add value to property. One of the reasons I thought it'd be quite interesting to talk about this today is I'm looking to do a renovation myself, but it's going to be a
• 3:08
  an owner occupied house. So there's a bit more of an emotional attachment. Everyone's giving me a million different ideas. One of the big ones that everyone keeps saying is, and it's probably what we're gonna end up doing, live in the property for a period of time before you make that decision. Because actually once you're in the property, you might not like the flow of it that way, or maybe the- You're the highest ambitious, you start to see what it may look like. Yes, yes. I might actually get my wife to watch the very first podcast, because this is gonna be quite relevant to her today actually. But in these, from an investment standpoint,
• 3:39
  they're not gonna have this ability to, well, you'd assume not to jump in and live there. How would they, from an investor standpoint, how do they know what's best to maximize value in a property? I think we need to look at the different types of value add first, but I will answer that. So the different types of value add is development. So we're looking purely residential, we're looking at development. So turning one block into two or one block into multiple.
• 4:03
  renovation which is can be as any as a kitchen bathroom it can be cosmetic in nature reconfiguration changing the floor plans and therefore the use of the property turning a 3x1 into a 3x2 and or ancillary dwellings which is granny flats those sorts of things
• 4:23
  So when to do it and how long to hold it for and those sorts of things. There's a big wave at the moment, again, as with the social media is flipping properties, go in there, buy something for $800,000, you know, spend $100,000 and then sell it for $1.3 million.
• 4:38
  Okay, that in theory makes sense. There's no way you're getting anything with substance for $100,000. So I don't 100% believe in that. But also then you're giving half of that money, those gains, back to the government. And people forget that flipping properties is huge in America because you don't pay stamp duty. So in Australia you do. So typically 4%, 4.5% you're paying. So you need to exceed that cost base. You buy something for $700,000.
• 5:05
  then throw your $30,000 of stamps on there, plus your exit fees for agents, allow another 15 to 20. So there's 50K, plus your $100,000 for renovation, you're at 150. So you need to be selling that property well above that to make it worthwhile, plus your holding costs. So...
• 5:21
  And then you're going to give 50% of that uplift back to the government for capital gains. So to answer that question, you want to be holding that at least 12 months and beyond. And so I'm not a big believer in buying something and flipping it within that 12-month period. I've done one recently where I held it for 12 months and three days. And that particular asset was and did a lot of work. We bought really, really well.
• 5:45
  bought that one in a regional market for 455. We spent about 35,000 on the renovation before the tenants got in there. And the reason I did that is because I was gonna get a massive uplift in rent during that period. So that was gonna offset a fair portion of the renovation. And you can get some deductions from those works. Some you can only, obviously you can't claim for things that are capital value, but you can claim for maintenance items. So there was a tax win there, which was great.
• 6:15
  And then I held it for 12 months because I knew at that point, once I'd spent that money, what I'd bought for $450,000, spent $30,000 on, was probably worth $600,000. So straight away, in theory, take away your stamp duty, your exit costs. I was probably up $100,000 in that scenario. If I sell that, I'm giving $50,000 straight back to the government. And we certainly don't want to be doing that.
• 6:35
  So by holding that for 12 months and one day, I was able to lease it out for the full 12 months, therefore get some negative gearing, some depreciation on the works I spent. So I was actually able to get some tax back from the government, which is great. It was about $15,000 in tax savings for holding it for 12 months.
• 6:52
  And then I was able to sell it for 670. So we exceeded. So there was market uplift in that period as well, which I expected, you know, that's what we do for a job. So I'd like to think we can pick markets well, but I wasn't relying on that. If the market didn't move at all, I was still gonna walk away with a $100,000 profit.
• 7:07
  In this scenario, I was able to increase that to $170,000, of which I'm not giving most of that back to the government. I can retain a large portion of that, so I'll probably lose about 25%. And with some creative accounting, we can probably get that a little bit lower in terms of the tax that I'm required to pay.
• 7:25
  So I think you need to ideally hold during a value add. In the circumstance that you discussed when it's own occupier, always encourage to live in the property first. I did one four or five years ago, and through that 12-month period of living in the property, the finishes were going to be a lot different by the time I was there.
• 7:44
  The floor plan in terms of how I was going to reconfigure it, which walls I was going to knock out, which walls I was going to keep, that all changed because once you live in a property, it's all about the use of that property, right? So once you understand the highest and best use, you want to accommodate that. So you do need to give these properties time.
• 8:02
  And from the investment side of things, when you're mentioning there, was that cosmetic, I guess that renovation that you did with the regional property that you bought? Correct. When you're looking at something cosmetic versus maybe some structural or subdivision, should you have a different strategy for each
• 8:20
  obviously it's gonna be a different strategy, but in terms of maybe an exit, like is there a certain uplift you'd expect from a cosmetic reno versus maybe more of a structural versus then you start looking at the sub development side of things? Definitely, and different appetite for different investor experience. For first, second and even third time investors, stick within the four walls, and that's typically cosmetic renovations. The moment and you just smile, which means you're knocking down walls and you're extending and you've never done.
• 8:47
  I've blurted with the idea of some approvals, but yeah. You're a seasoned investor, so, and you can always, reach across the desk and ask for some advice off me, so it's gonna be okay. But why I say that is because the moment you start, you're going outside the four walls that are currently in the house, you require typically a development approval, which takes time, it's costly, you've gotta get plans, they're costly.
• 9:10
  And the building costs go from often what is an overqualified labourer who can do some chippy work to a fully qualified builder that's taking on risk and liability. So the cost of that renovation, you might as well throw an extra 30% on top of what it could have been if you kept it within the four walls, minimum, often more. So keeping it in the four walls keeps costs down.
• 9:34
  your ability to trade, you can probably manage most of it yourself. There's a lot of skilled, you know, people that are quite qualified in this space that they might be an accountant, but they're quite handy at home. I'm not, so I need other people, but I can get various chippies or even like I said, laborers to do most of the work. So by keeping in the four walls does limit the cost of the project and the time of the project. And sometimes time is money because if it's investment,
• 10:00
  every day that there's not a tenant in there, it's a day it's costing you more money. So we need to get in and out of these jobs quickly. So if you're waiting 90 days for an approval, then you're waiting another month or two for a builder, and that builder's got other jobs that are a bigger priority, it can start to blow it and that costs you money. So keep it in the four walls. The best return on investment I'm seeing in older style houses at the moment
• 10:21
  think 1950s to 1990s is laundry conversions and that's the old three by one might be 70s or 80s with massive laundries you know for some reason they just the housewives of the 70s and 80s loved a big laundry it's good on fantastic but it's not needed anymore you just need two cupboards you can put a dryer and a washer in those and put that in the second bathroom
• 10:46
  So converting a laundry to a second bathroom, a great example was one in a slightly inner suburbs, a suburb of Inglewood in Western Australia, not recently done, and this is probably a great example of a development and a renovation all in one run. So talking through that experience, bought a property for 800,000 in 2019, I suppose the
• 11:11
  the beginning of the perth cycle we we timed it well if you had to pick the top of the bottom of the market in in perth it was probably about then maybe six months later than that picked it up 800 activated the subdivision so it was a corner site retain and sub so we put those approvals in place right away so in that scenario i do encourage everyone to go out there and get the approvals because that took probably nine months
• 11:33
  And you want assets to be more liquid than not because things happen. So in this scenario, it was fortunate and I didn't foresee that COVID was coming. It was fortunate that I got those approvals because what happened when COVID hit?
• 11:46
  the government introduced the building grants, $25,000 grants for those who are gonna build a new home. So all of a sudden land prices just went out out of proportion to the grant. So I had a block that I hadn't done anything with, I just had the approvals there. It was probably on face value worth $380, $390. It was a small block, so the total block size was 720, and we carved off about 260 square meters at the back for the land, kept the rest for the front of the house.
• 12:13
  And that 260 wasn't a great block. You can't build much with that. So probably worth 390. Building grants come in. Everyone gets excited about land. I have to get things in place to get that approval moving. And we're able to sell that for 480,000 because of that grant that was in play.
• 12:29
  So it's been having that ability to be liquid and we acted on those approvals. We had it sold and settled within three months. So it was great. So that all of a sudden, that $800,000 loan, I've wiped off more than half of that, 480 straight off that debt. So now I've got a positively geared character dwelling in a city suburb.
• 12:48
  that's probably at that point worth 950 i'll say nine 950 um with with with minimal debt so it was you know a good scenario fast track to recently when i needed to sell that because it was a half block we had some uplift base value of that property was you know circa 950 as discussed
• 13:10
  But now I needed to maximise the exit of that strategy. So I hadn't done any work to the front home. It was completely Italianised, so just tiles everywhere. It was a really funky floor plan. It was sort of like a two-by-one with two living areas and a massive laundry. But it was big. It was like 150 square metres of house.
• 13:30
  So we reconfigured it, turned it into more of a traditional three by two. So made one of those offshoot living areas, another bedroom, formalised bedroom. We put the laundry into that larger bathroom, still a massive bathroom, and put the laundry in some cupboards and then created an ensuite with that, what was the initial bathroom and turned what was a very average three by one into a really nice family home three by two that would attract families.
• 13:58
  And so what we spent close to 200, so it was a bit of an investment, 200,000 on that renovation. So it went base level prices of 950, spending that 200, it puts us in for 115 and we're able to sell it for 135. So for that 200 spend, we made an additional 200,000. So cash on cash return. That's purely from ensuite and then turning one of the living rooms into the next bedroom? Right.
• 14:22
  Correct. And we updated the kitchen, bathroom. So we did the floor coverings, painted it. So for $200,000, you'd expect pretty much a whole house renovation, which it was. So you can work off bathrooms. I wouldn't want to be spending any more than $10,000 or $15,000 for an upgrade. Kitchen's probably $25,000, $30,000. But yeah, we've turned a basic three by one into a completely modernized three by two, spent $200,000 to make $200,000. Again, we're not relying on market uplift because we've already had that in the lead up to that.
• 14:52
  So from that particular asset, over the course of five years, we're able to pull out a million dollars of that property, which your cash on cash return is unmatched. So it was using sort of all the investment fundamentals of buying, holding, getting some market uplift,
• 15:07
  activating a development and also activating the renovation all in one it's a great slam yeah well it is it's the advice of including clients and what we've bought predominantly for the last eight years in business and as I've always said we've got to I can only advise on what I do myself so it was just great to see that play out
• 15:25
  as expected because that's what you hope when you give advice and when you do things yourself you hope they play out that was one of my an investment I did with a really good friend of mine so it was great for him to see that go from start to finish because when he's seen the renovation bill he was starting to get a bit nervous and he was stuck so that's that's a scenario where you can pull them all together but sometimes it's very difficult in a rising market to secure those type of assets
• 15:51
  That was a good point you said there with your friend when he saw the bills, because one of the things I wanted to ask you was, is there a certain amount of capital that someone should have before looking at these development deals? I speak to a load of first-time investors, clients,
• 16:07
  Character I spoke to the other day on the phone, I asked him about budget, deposit, what his experience is. And he's, I'll just go door knock. I'll just go door knock to find someone to do a JV with. But it did raise the question, when is a good time? We speak to a lot of people that maybe don't even have a current residential portfolio, but want to get into that development space. Capital wise, what should someone be looking at? Or should they be relying on the market to do the heavy lifting for them?
• 16:36
  You've got to get stepping stone assets. Again, I didn't activate that development or that renovation until I'd already had capital uplift. And I used the funds, the equity from that capital uplift to reinvest back in the property. And that's when you get larger returns on investment. So stepping stones, the problem with development sites, everyone goes, I want to go and get a development site.
• 16:56
  They don't realize the cash burn on those properties is so significant. It costs you, one of the developments I'm holding at the moment cost me $90,000 a year to hold that development site. That's not sustainable. So you need to get yourself in a position where that is sustainable to be able to take on that sort of size of developments. Larger, 12 lot subdivision. So the upside there, but I am still waiting and holding on the basis of A, capital growth and B, making it more tax advantageous.
• 17:24
  So when is the best time? Start smaller because, and that's why it can typically be encouraged to do some works up front, increase your cash flow, increase your rent. You're still adding value, so you're adding capital value, which will increase the value of property. So you've got equity from day one and you're increasing your rental return. And that's the game of property investment. Typically, it's hard to hold on to property longer term.
• 17:45
  So to help with that, you need cash flow. To get cash flow, you can increase rent through renovation, reconfiguration. So that in those scenarios, it can make sense to do it up front. In terms of when to step into development, again, I would encourage it to be in a stepping stone scenario. For me, by the time I got that development site, that retaining sub, my fourth or fifth investment was,
• 18:10
  Do you think that's a good first strategy, a retainer sub for a first time? For a developer, yes. I think the first strategy, first off the bat, should just be a renovation, a reconfiguration, a basic value add. See it works, see the value. Get equity. Get that equity and then use that equity to recycle into your next investment. And once you've mastered that, because the risk with development is it takes longer. And if markets have more volatility, you're midway through a development.
• 18:36
  and a COVID event happens. Albeit that ended up being a positive, a GFC event happens. And you put all this capital into that development and you've mistimed the market and it becomes a little bit illiquid. It's hard to sell something that doesn't exist yet. So you have to really wait it out and everything takes longer than you expect.
• 18:53
  So I think starting small, renovation, reconfiguration, and you can get that done in as little as four weeks, six weeks, eight weeks. You create equity for every dollar you spend. You want to make a dollar back. So if you're going to spend 50, hopefully that adds $100,000 worth of value. And you've got instant equity, 50,000 that you can use to reload into something else.
• 19:12
  And then just gradually, in bite-sized pieces, take on more exposure to more complex projects. And that might be from a basic renovation, cosmetic painting, tiles, maybe a kitchen bathroom, to a full cosmetic renovation. I've replaced the kitchen, I've replaced the bathrooms, to a conversion. So I'm going to convert a 3x1 into a 3x2, and I'm going to create an additional living space and an additional bathroom.
• 19:42
  to braving it up to maybe doing an extension and that's what you're about to go through and you'll find that is a lot more work and it'll take a little bit longer and then once you start to master those and get comfortable with you know the cash flow because there's cash flow issues how to control those cash flows how to budget for them you start to step into developments and then it may be retained and sub small project where you carve off a bit of land you may sell that land put that back into the front house and then you cash flow positive on that house that can be a
• 20:12
  strategy was to own a half blocks where I've sold the land, I've pushed that into the front and I've paid off the debt and that's paying me an income, not a bad strategy. And if you just did that and nothing else, you're going to be far, you know, a long way ahead. And do a lot of, I'm going to speak to the Perth audience here because you, a lot of these examples you've said are Perth. I'm talking about an example myself in Perth. Do these opportunities exist or, you know, it feels like,
• 20:39
  Development opportunities are few and far between what they were maybe pre-COVID. They do, they do. We just bought one in Frankston in Victoria, same scenario. It's a retained sub sub. So you can keep the front house and you can subdivide the back two blocks. He's gonna sell one block to pay off some debt on the front, which will decrease his cash burn and then keep the other block for when the market completes its cycle.
• 21:02
  There are always opportunities to add value. And we're not in a situation, I don't think we ever will be, where there won't be an opportunity to add value and to improve the highest and best use of a residential and or commercial property. And what do you think, with that in mind, what do you think a successful development deal should look like in terms of growth perspective? So if you're looking on a feasibility,
• 21:31
  your minimum target needs to be 15% because you've got to understand it's all about your opportunity cost on that capital. And if you go in with anything less than 15%, you start to get in and things start to blow out. And that's all it's about. Always with property investment, it can never be overstated to protect your downside risk.
• 21:50
  And that 15% buffer is your risk mitigation. If everything goes to according to plan to a finite dollar figure that you've been able to forecast and budget for, that's amazing. And then all of a sudden there's been some market uplift, your 15%'s turned into 30. Well, that's cream, but we're not relying on that. We know if things go wrong, that 15 may slip to 10, but I'm still 10% in front.
• 22:14
  If I was fortunate to get market uplift during that time, that 10% has now gone to 20, well, that's just a bonus. So do your numbers on 15. In a rising market, that 15 becomes hard because you're competing with, in the development space, you're competing with builders that will look at that triple X site that you're doing your figures on, and they can go, well, I can take that site on at 0% margin, knowing that I'm going to get 20% margin on three builds. So that's where you have to be, you know,
• 22:41
  willing to work, roll up the sleeves, find these deals more than a builder. Fortunately, builders don't work too hard to find good deals. So we're always buying them before builders even get a chance to look at them. But that's what you've got to understand. It does get harder. And even for us, we're in the markets every day across Australia looking for these type of deals. And we miss good opportunities because we don't have quick enough or another developer's got in before we've had the chance to secure them. So they're not easy to find.
• 23:09
  And that's when you start to have to realize, what is my bottom line? And we're pretty cautious to stick to that 15%. Do you see any horror shows? You're talking there, builders are a prime investor that goes and buys these development sites, which I totally understand. Someone in your position with your background being in the property space as well would be a prime target for those properties. But let's just say your mum and dad investor or your average punter at home,
• 23:36
  Could they do that on their own, A? And then B, have you had to take over a site because someone's had to tap out because they've deaded over their eyeballs and they haven't planned properly and cash flow has become a serious issue and they've had to sell it at a loss just to either break even – sorry, sell it at a loss just to get out of the asset.
• 23:55
  My best purchases, both in my personal world and for my clients, have been exactly that scenario. They've had to sell because they've underestimated the cost or something's gone wrong through the development and we've been able to pick it up at cents in the dollar because it's an ugly duckling now. And I've just secured one in the last two months for that reason in a market that I'm no longer trading in but the opportunity's so good, the upside's so good that our downside risk is completely mitigated.
• 24:24
  So you're right for those trying to do it. That's why I think if you're going to do it, either pay professionals to do it, and this is not a spruik to get business by any sense, but you don't know what you don't know. And in this space, it can be really costly. COVID demonstrated that. A lot of mum and dad investors doing developments lost money because the biggest problem was,
• 24:43
  they were mid construction and there's nothing worse than being mid construction and your builder pops because then the next builder that comes along has to guarantee the works that have been done they will charge drug money to to complete that they'll literally it's it's it's
• 25:02
  It can be criminal what they will charge and what the insurers will charge to certify the work that's been done. So, if you haven't done it and you haven't sort of participated in the stepping stones in the lead up to larger developments, and when I say large developments, I'm talking about a triplex or a duplex. There's cost risk there because you're talking about if you're building two brand new houses now, you're talking over a million dollars of construction.
• 25:27
  and most likely have a million dollar land, that's a couple of million dollar development. So, albeit it's not mass in scale, we're not talking about a 50 lot subdivision. For a mum and dad, taking on that level of risk uneducated can be a very dangerous space to participate in. Beautiful, man. Let's just focus on renos. I know you've spoken about a couple of case studies, which is quite insightful.
• 25:52
  One of the examples there were you mentioning adding value to a kitchen and a bathroom. If it's cosmetic, I think you get reference like 15, 20K. Going through that process now, it's significantly increased, I think, over the last few years, especially in WA with builder's costs. Difference for an own occupier than investor. Because your kitchen expectations versus some investment properties is very different. Correct.
• 26:16
  What do you think the easiest way to add value then from a cosmetic standpoint from an investment property? Yep. The biggest mistake investors who are completing renovations make is spending money on things that you can't touch, see or feel.
• 26:33
  And albeit, yes, you want to do the right thing for the next owner and you want to make sure that you're adding value to the house. A great example is insulation. You tell me when you've walked through the house and gone, geez, this is fantastic insulation, yet it would cost you 15 grand to do it properly, probably more. So don't be spending money on insulation because when someone walks through a home open to buy that property, the last thing they're thinking about is
• 26:58
  Jeez, the insulation's fantastic. I can smell that insulation. Yeah, those pink battens, I can feel it. So there's many examples of spending money like that where you just can't see it, touch it, or feel it. Even ACs, this particular property in Inglewood, is freezing in winter and so hot in summer, it's like an oven, it's double brick, so it heats up in summer. And constant tenant feedback was we need split systems in that property. And I probably should have provided that, and I did.
• 27:26
  During the years, I think we provided one, but that house probably needs four or five. Do I spend 15 grand on updating the AC and cooling, or do I spend that on a new bathroom? When people go through a home open and it's at 11 o'clock in the morning, it's quite temperate, what are they thinking? They're not looking for the split system. And that split system would be an eyesore and an eyes character home, by the way.
• 27:46
  So let's not put that in. If they need it or want it, they'll do it themselves. Let's spend it on where they can see, touch and feel. So your flooring is a really big one and can be quite like that particular one with all these Italian tiles. So just going straight over the top. Don't even pull them up because if we pull them up, it's cost intensive. We went straight over with timber laminate tiles. Looks great, cost effective and presents well at home open.
• 28:09
  Painting, it's the best money you've ever spent. Painting and landscaping are the two best, dollar for dollar input, output, that you'll get in a renovation. Because people walk in, first thing they see, oh, it's lovely landscaping, that's lawn. And those plants that you put in for the home open, whether they're alive in three or four months, isn't really your problem. And I don't want to sound cynical in the sense that you're not there to help the next user. You are, but at the end of the day for our clients, I'm there to get the best possible price we can on the exit or advise them on it.
• 28:39
  So gardening's a really easy one, and it doesn't have to be expensive, but you can really pad it out. Presentation, also equally important on the exit. So that's what you're thinking. Every time I'm completing a project, I've got quite a large project at the moment that will go sort of in the higher end range, so I'm targeting own occupiers. And constantly in my mind, I'm thinking,
• 29:01
  what are they going to look at? What are they going to feel when they walk through this home open? And then I'll get conversations from various builders where it's, you know, you need to be spending money on shading in certain areas so it protects the floor coverings over periods of time. I'm like, that's a four to five year problem. Whereabouts is certain drain pipes going on the roof?
• 29:24
  various parts of the house. It's like an, for an own occupier, that would be relevant, but for an investment perpetrator's adding value. But even for an own occupier, if you're going to sell that property, that's, you know, when you walk through, when you sell a property, how do you sell it? You take it to market, you stage it, you make it look at, you know, you want the photos to absolutely pop.
• 29:43
  So that first experience when they walk through that home open is all they remember when they're putting offers in that emotional experience is what you're trying to target. So practical things go out the window. You know, storage is one that gets overstated all the time. Doesn't have enough storage, doesn't have enough storage. Storage is important because typically if you have a relationship that I am, I might not be the decision making for that purchase. You know, some people can start to think, you know, female buyers have a link to storage. There's not enough cabinetry.
• 30:10
  But when you go through a home open, it's typically not at the front of mind. Where's the storage? Where's the storage? You're getting wowed by the ensuite, getting wowed by the kitchen, getting wowed by this is going to be a great place to entertain. You're going to get wowed by the facade, the garden, the outdoor space where you can play with the kids. All those things that you can touch and feel become really, really important. Practical things less so.
• 30:33
  So, if you're gonna live in that home, absolutely, you gotta be as practical as you can be. But if you're looking to add value to sell, throw practical out the window. What do people think? They go through a home open, average time through a home open is 15 minutes. You think they're looking at, asking questions about insulation, what's the ducted reverse air conditioning, where's the storage? No.
• 30:58
  They're not. They're thinking, wow, this is going to be a great place to host a party. Can't wait for my friends to come around and see this place. Kids are going to love this. Look at that outdoor area. You know, be able to kick a footy. All those emotional drivers come into play. That's what you want to appeal to. So, you know, like I said, the best money you can spend is on those sorts of features. And you're right. I think in terms of, you mentioned there, the emotional kids in the background, entertaining. Yeah.
• 31:23
  about to start a renovation journey myself, that's exactly, those exact things you said are what I'm daydreaming about, thinking about how it could potentially look and how it will feel. So if you can, you know, not manipulate that, but if you can highlight those types of characteristics of a home, I think that's what's going to appeal to the buyer, not your...
• 31:42
  Yeah, your pink bat insulation that you might want to do. That's it, you know, you triple-glaze windows. Yeah. Double-glazing is obviously more common than like, but people can, and I've done that personally. There's one project in particular that I was referring to. I've spent a lot of money in areas that I probably shouldn't have, because I thought I was going to live in it, and then I realized it's far too big for probably what we need, so.
• 32:03
  Someone with a family probably should enjoy that, but there was a lot of practical things that you can spend hundreds of thousands on that I don't think come to market, people are gonna appreciate as much as I have in that project. So you can get too emotionally attached, different when you're gonna live in it. What type of assets, and this is purely speaking from a cosmetic or potentially structural, I guess, but not development. What type of assets offer the most upside with the least amount of work?
• 32:32
  What type of assets provide the most upside with the least amount of work? Straightaway development sites come to mind because, and this is speaking to investors, I know I've gone down the path of being really, really cautious with developments, which I am. Particularly if you're actively developing and trying to build and you're putting a lot of capital outlay.
• 32:54
  That example about Inglewood previously, that passive strategy that has the ability to activate upside can be your quickest wins. Because when the markets have state of development, so when we see a market run across the country like we have now, we've seen Adelaide, Brisbane and Western Australia perform extremely well, you see a scarcity of land, particularly infill locations. And that's what we've seen. We've seen a national shortage of properties. We've seen buildings stabilize,
• 33:24
  now we can't find any land to build on. So what becomes really topical or really sought after
• 33:31
  is land. So if you've got a site that can be developed, albeit you may not have the financial capacity or the experience to develop yourself, you'll get an unproportionate uplift on that land because the developer or a builder will pay you for the opportunity to develop and on sale. And that's what we're seeing. Like I said, a flavour for us was buying development sites in Perth, for example, and Adelaide in 2018, 2019. We probably bought over 100 properties in each
• 34:01
  Some of our clients are actively completing those developments and doing extremely well, and we're assisting them through that process. Others don't want to have the time, effort, or energy to want to do so. They're selling them as unactivated sites. And what we're finding is what we referred to before. Builders will go in there and play in them. Say the land value is on today's dollars, $1.2 million. You get a developer going in there or a builder say, I'll give you one, four, one, five.
• 34:25
  200 or 300 more than the market because they know they can complete that triplex make their margin on the build and exit with a return so i think the quickest uplift with the little amount of work is subdivision upside be that a duplex or triplex site
• 34:40
  or just those little wins that we spoke about at the start, buying something, an ugly duckling, that the market at the moment, at the top end of the cycles, or in growth markets, typically the finished type product attracts a premium. You're paying for someone else's work, be the one to do the work yourself.
• 34:58
  What about granny flats or modular homes? There's a big, I guess, there's a lot of talk amongst that in the media, I guess, or in the social media about a bit of an uptake on these types of renovation projects, I guess. What's your thoughts on granny flat adding value either from a yield perspective or...
• 35:20
  I think cash flow... Is it purely a cash flow perspective or does it actually add value to the property long term? You think, why is there such a movement? Because there's such a shortage of property and because the cost of property has gone up so significantly. So I think there's been such a shift towards modular dwellings or granny flats to help accommodate that next generation that can't get into the market. You know, you've got...
• 35:43
  Mum and dad are on a big block, 800 square metres. I haven't saved it for a deposit, but mum and dad don't really want me in the house anymore. Where am I gonna go? They can add a house at the rear for 150 to 200,000, and it serves the purpose for the next five to 10 years, potentially, for that child until they've got the ability to get out of home. So I think there's a big push for that. I think there's a massive push because there's a shortage of property and you don't have to go and buy a property for a million dollars to get the same amount of rent.
• 36:10
  you know the great example of our client that we recently helped through that process get a granny flat they were in it for about all in for 180 000 and now they're getting 650 a week for that granny flat so from a cash flow point of view yeah it is and and you know that's a payoff period about three and a half years so there's upside there as well yeah um so i think you're
• 36:31
  You'll see more of that, A, for cash flow, but B, to solve the shortage in those personal situations where they just need the accommodation to house family members. Yeah. And just probably wrapping up on the reno side of things, we touched on with the development side, you'd be looking at a minimum 15%. It ain't worth getting invested in it if you're not going to have at least a 15%.
• 36:54
  return, what about from a cosmetic reno? Like what should someone be looking if they are looking to flip say after 12 months like the one you mentioned earlier in the chat? Yeah, again, you'd be doing your numbers conservatively on 15%, but you're gonna understand you're comparing like for like. The way to do that is in that scenario, see what finished product's selling for, see what you have to buy that property for, and then what it's gonna cost in between. So you get your end pricing goal, hypothetically finished product in
• 37:25
  Mainlands is selling for $1.5 million. However, I can pick up an original three-by-one for $1 million. What's it going to cost me to get it to that 1.5 level? And if that figure's $200,000, well, there's your $300,000 uplift. It sounds simple in theory, but they're the numbers you need to be working. And the market's scared of it. The other competitors in the market...
• 37:45
  you know when i say competitors the other investors there's a fear around building there's a fear around renovations because of what happened during covid and when there's fear it's typically the best opportunity so we've picked up our best deals in the two years post covid because what others were saying building costs you know they have gone up there's no doubt about that
• 38:06
  But so is the market. And that's only been echoed in what the sales of NVALs, like that previous Inglewood example I told you, was $200,000 more than we ever accounted for when we took on the project because the market's willing to pay for it.
• 38:24
  And that's what you want to target, I think, with every property, every project you're doing. As I said before, when you're doing these works, I want you to picture the moment you're selling it, what they're looking at that home open. But also think about who that person is. So dive into the emotions. And ideally, you're selling that property back to an own occupier.
• 38:44
  Both examples that I did in my personal world, regionally and more so in the Cap City, both sold to our own occupiers, and everything we did through the renovation process, the staging process, the sales process, was all targeted to an own occupier, because that's who's gonna pay your premium. You're not gonna get an investor come in and say, great, there's seven offers in place, I'm gonna be the highest offer, because the yield's not gonna make sense for that particular buyer.
• 39:10
  So it's always ideally you're selling back to an own occupier that's emotionally invested in the property because they've just fallen in love with the work that you've done because the whole period of time you are addressing what they would be looking for. And you're about to do that in your own home. So those emotional things that you're spending time and money and effort on are the same things that will be appreciated if they can be seen, touched or felt at a home open.
• 39:34
  Beautiful. I think I know where the answer's going. You can see how passionate you've been about this episode already. So Lachlan, passive investment is a lazy investment. Do you call bullshit?
• 39:45
  I don't call bullshit. I do think it is lazy. It's certainly not the ethos of our investing. We're always trying to add value where we can. Not at the cost, I must say, of opportunity cost. So if you go out there looking for a unicorn and spend two years trying to find it in a rising market, then you've cost you or the client money. So there's got to be a rationale behind it. But certainly in every way we can, we're looking to add value. Make sure to join us next episode. Stay informed, stay curious and keep going after bullshit.