Property Investment
6 min read
Author: Louis Fraysse
Louis is a registered financial adviser with an MBA from Massey University.
Reviewed by: Stevie Waring
Financial Adviser with 7 years of experience. Property investor in Wellington and Christchurch
As a financial adviser one of the main questions people ask me is, “Should I renovate properties to grow my wealth? Or should I invest in New Builds?”
Renovating can be a successful investment strategy ... I’ve spoken to investors who’ve created six figures of equity from a single renovation.
But that doesn’t mean it’s the right strategy for everyone.
In this article you’ll learn the 5 questions you need to ask yourself to work out whether renovating is the right investment strategy for you.
Now just keep in mind that here at Opes Partners we generally recommend New Builds to investors.
So there is an incentive for me to tell you not to renovate properties and buy a New Build instead.
I’m not going to do that. Instead, this will be an honest analysis, where I lay out the pros, cons and trade-offs. Then I’ll take a step back so you can make the decision for yourself.
Renovating can create equity faster, but it usually requires more money, skills and time than a New Build. The right strategy depends on what you’re trying to achieve and whether you’re prepared to take on the extra work and risk.
Don't start with: “I want to renovate.” That’s not often the goal for most investors.
Do you want to create equity now, improve your cashflow, or build a larger portfolio for long-term wealth?
| Your goal | Strategy that may suit |
| Build a larger portfolio | A New Build may leave more money available for your next purchase |
| Increase cashflow now | Renovating may allow you to increase the rent |
| Manufacture equity now | Renovating allows you to actively add value |
For example, one investor we spoke to bought a run-down Palmerston North property for around $300,000.
He spent about $110,000 renovating it and once finished it was valued at around $530,000.
That's roughly $120,000 of additional value created through the renovation.
That's the attraction: you can create equity yourself.
But a New Build strategy generally requires less money upfront. That can leave more of your deposit available to buy properties #2 and #3. That’s because New Builds are exempt from the Reserve Bank’s loan-to-value ratio restrictions.
So before you decide how you’re going to invest, decide what you’re trying to achieve first.
Is it a one-off equity hit or do you want to grow a bigger portfolio?
Renovating can require a lot more money upfront.
Let’s say you want to invest in a $700,000 property. If it’s a New Build it would need at least a $140,000 deposit most of the time.
If it’s an existing property, it would typically need a $210,000 deposit.
And that’s before you’ve picked up a hammer.
A typical renovation often costs $65,000 to $80,000.
If you spend $70,000 renovating, you could need $280,000 upfront – double the $140,000 New Build deposit.
| If you have | What it could mean |
| A smaller deposit | A New Build may be more achievable |
| A larger deposit + renovation budget | Renovating becomes more realistic |
| Enough money for an existing property, but little buffer | Be cautious – renovation costs can blow out |
And the budget you start with isn’t necessarily the budget you finish with.
You might uncover rotten timber; materials might change; or the job might be delayed.
One investor we know is a quantity surveyor. His job is literally to understand what construction projects should cost.
Yet when he started renovating his own home he was hit with an unexpected $9,000 excavation bill … which he is now disputing.
That’s an extreme example, but if a quantity surveyor can get a surprise $9,000 bill, it shows how difficult renovation costs can be to predict.
With a New Build you generally know what you’re paying upfront. With a renovation, there are more opportunities for the final bill to change.
Renovating is an easy property strategy to picture yourself doing.
You’ve painted a bedroom. You’ve watched The Block.
So you think: “I could do that.”
But renovating a property profitably is different from making your own house look nicer.
| Your experience | What it could mean |
| Experienced tradie/renovator | You have skills that could reduce the cost of renovation |
| Handy, but little renovation experience | You may be able to do some jobs, but you’ll still need professionals to help (e.g. builders) |
| No practical experience | Budget for a team to do the work rather than relying on DIY |
And even if you genuinely have the skills, ask yourself whether you actually want to use them.
One investor we spoke to is a builder.
He planned to renovate an older house himself and save money on labour.
Five weeks in, he’d had enough.
After building all week he didn’t want to spend his evenings and weekends doing more.
Five years later, the renovation still isn’t finished.
Of course, you don’t have to do the work yourself. You can hire professionals instead, but then you need to factor labour into the numbers.
That’s one of the big differences with a passive New Build strategy. You don’t need to know how to renovate, find tradies, or work out which jobs you can safely do yourself.
Renovating a house takes a lot of time.
We know that because for tradespeople renovating houses is their full-time job.
So, if you’re planning to do it yourself where are those hours going to come from?
After work? On the weekends you spend with your family?
Some investors do sacrifice family time and free time to renovate properties … others aren’t so keen. Ultimately it’s your choice.
| Your situation | What it could mean |
| Plenty of spare time | DIY and project management may be realistic |
| You’ve got some evenings and weekends free | You can renovate, but expect it to take up a lot of your spare time |
| Busy career / young family | A hands-on renovation strategy may be difficult to sustain |
Of course, you can pay someone else to do the work.
One investor we know works full-time and still renovates around two properties a year. He has a team who do most of the physical work for him.
And it works: his latest project created around $120,000 of additional value.
But having a team doesn’t make the investment passive.
His recent renovations had issues with burglary and vandalism. Over Christmas he even slept at one of the properties to deter break-ins.
He was still mowing lawns, checking on the property and dealing with problems as they came up.
That’s the trade-off.
You can outsource the building work, but you don’t necessarily outsource the headaches.
A New Build is different. It’s a much more hands-off investment. You aren’t managing trades, spending your weekends painting walls or checking on an empty renovation site.
So, if you’ve got plenty of spare time and want to be hands-on, renovating might suit you.
If you’re already juggling a full-time job, kids and everything else that comes with life, you need to ask whether you really want another job on top of that.
If your goal is to own several investment properties, don’t just ask whether this property is a good investment.
Ask: How does it help me buy the next one?
| Your priority | What it could mean |
| Grow a larger portfolio faster | New Builds may suit because the lower upfront cost can leave more money available for your next purchase |
| Create equity to partially fund the next property | Renovating may suit if you can manufacture enough usable equity |
| Not focused on buying again quickly | Either strategy could work |
This is where the money you spend on property #1 can affect how quickly you get to property #2.
A New Build may leave more of your capital available for another deposit.
For example, say you have $280,000 of usable equity available. You could use the full amount to buy a $700,000 existing property and spend $70,000 renovating it.
Or that same $280,000 could cover the 20% deposits on two $700,000 New Builds.
Of course, the bank still needs to approve the lending.
Having said that, while a renovation costs more upfront, if it’s successful it might create equity to help fund a part of the next purchase.
Renovating can be a successful strategy if you have the money, skills and time to do it well.
If not, a more hands-off strategy may suit you better.
| Renovating may suit you if | A New Build may suit you if |
| You want to manufacture equity now | You’re happy to build wealth over the long term |
| You have the money and a healthy buffer | You want to use less money upfront |
| You have the skills – or can pay a team | You want a more hands-off investment |
| You have the time to manage a project | You want to focus on growing your portfolio |
But neither strategy is automatically better.
So, don’t just ask: “Could I make money renovating?”
Ask: “Is renovating the best use of my money, my skills and my time?”
If the answer is yes, pick up the hammer. If it’s not, there’s nothing wrong with leaving it in the toolbox.
Louis is a registered financial adviser with an MBA from Massey University.
Louis is a registered financial adviser with an MBA from Massey University. He's also a property investor and a father. So he understand firsthand what it's like to balance family, investments, and long-term financial goals. Louis is based in Auckland.
This article is for your general information. It’s not financial advice. See here for details about our Financial Advice Provider Disclosure. So Opes isn’t telling you what to do with your own money.
We’ve made every effort to make sure the information is accurate. But we occasionally get the odd fact wrong. Make sure you do your own research or talk to a financial adviser before making any investment decisions.
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