From Reno To Hero
Reno to Hero is a great option to consider if you already own property that has the potential for a cost-effective renovation, writes Dee Singh.
31 August 2022
Many Kiwis want to invest in property. They get excited. Find a property they think will make a good investment. Then they apply to the bank for the money. And just as it seems like they’re on the path to financial freedom, the bank says no. Heartbreak.
What should these clients do? They still want to get ahead financially and think investing in property is the way to do it for them. But they can’t get a loan to invest. At least, not yet. For the most part – in fact, in almost every circumstance – these investors are left on their own. Bankers don’t want to help because they don’t fit the box, and brokers don’t want to help because there’s no payday in sight. So, the clients are left to figure it out for themselves.
Now, over time the amount they can borrow from the bank will increase. Their equity will improve as their house increases in value. And their incomes will rise through inflation and advancing their career at work. So, if you can’t get a mortgage for an investment property today, perhaps you’ll be ready in six years. But that’s still a long time away. Couldn’t you shortcut the process? Could there be a way to get it down to one or even two years? That’s what our process for getting investment ready is all about. It gives you six real strategies that you can use to get investment ready faster. This article covers the third strategy, reno to hero.
Strategy Three - Reno To Hero
Whilst last month’s strategy – split banking – is by far a favourite of ours at Catalyst, reno to hero is a great option to consider if you already own property that has potential for a cost-effective renovation. If done correctly, this is a great way to increase your equity and borrow more.
The Problem It Solves
As mentioned above, if this is done well the reno to hero approach can result in increasing equity, allowing you to borrow more. For example, converting unused space to allow for another bedroom.
What do I need to use this strategy?
- You need to already own a property that can be cost-effectively renovated to increase its value.
- You need to have enough useable equity in your portfolio to borrow the money to renovate, $20,000– $50,000, or have the money in cash.
Exactly How It Works
You renovate your property, which increases its value. Because the property is more valuable, you borrow against it. You then use that extra money as the deposit for your next investment property.
The minimum return you should aim for is $2 for every $1 you spend. So, if you spend $25,000 on a renovation, you need to make sure the property increases in value by a minimum of $50,000.
But, not every renovation project will cost-effectively increase the value. That is why investors should focus on the six Cashflow Hacking steps of:
- add an extra bedroom
- make it a multi-income property
- renovate bathrooms and kitchen
- replace fixtures and fittings
- paint the internal walls
- clean or replace the carpet.
From our experience, these are the steps that are most likely to improve the value and rental return of your property.
How Does This Increase My Available Equity To Invest?
If you utilise the reno to hero approach you could release equity in your existing property that you didn’t know was there. Leveraging against property you already own could be the key to getting that deposit funded for your next investment property.
Take these estimates as an example: you borrow $30,000 and increase the value of your property by $100,000. This means you can potentially borrow up to the full $70,000 gain to reinvest into another property to help grow your portfolio.
If you don’t know where you can make the biggest impact with your money talk to a specialist, the team at Opes Accelerate know what they are looking for and can guide you in the right direction. Similarly, if you are making changes that require tradies get them booked in early.
Steps Required To Use This Strategy
- If you are renovating an investment property, you already own, give your tenants notice to vacate the property. This means you can renovate the property quickly and achieve the market rent afterwards.
- Set up a revolving credit against one of your properties if you intend to borrow the renovation costs. This means you only pay interest when you spend the money.
- Work through the six Cashflow Hacking steps to see which ones you can apply to your property.
- Get quotes from appropriate companies, depending on which of the Cashflow Hacking steps you use.
- Get a registered valuation through your mortgage adviser once the renovations are finished. This will establish the new value that you can borrow against. The bank will only accept the new valuation if you directly organise it through your mortgage adviser or the bank.
Sounds straightforward right? Maybe if you are a seasoned investor, it is. But if you haven’t done anything like this before it can pay to engage a professional. Having key people help to implement a strategy such as this one is something we’d strongly recommend. If you want to know if this strategy can help you, then get in touch. We’d love to help.
You can use Opes Accelerate to help you know which renovations to do for your property. This means that an experienced renovation focussed property investor will work with you to determine what opportunities exist in your portfolio.