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Reality bites for renovation TV shows

Tuesday, 1st Nov 2011
Categories: Newsletter

handy man

There’s no doubting Australia’s love affair with renovating, a fact which producers of reality renovation TV shows have jumped on.  While these types of shows offer great entertainment and possibly help reignite interest in the property market, the reality is that they don’t get down to the details when it comes to profiting from the exercise.

As a viewer, you’re in dangerous territory if you think it’s easy to make money renovating because what these shows promote is not quite reality. At the conclusion of each of these shows, even though some properties appeared to turn a profit, it’s extremely unlikely that any of the properties actually made a real ‘on-paper’ profit. That is, if you or I were in their exact same shoes as a private investor and did the sums at the end of the day, we’d be walking away with a loss.

It may sound like I’m against renovations, but that’s far from the truth. However, I do believe that if you are going to incorporate renovating into your investment strategy, then you need to know what you’re doing or you’ll end up in the same boat as these contestants. These shows don’t communicate the real costs and underlying fundamentals of renovating property for a profit.

They tend to gloss over other costs involved such as stamp duty, selling agents commission, interest and other holding costs and capital gains tax. Not to mention, many of the contestants on these shows won prizes such as a pool or appliances package or had the help of free labour, which wouldn’t have factored into the bottom line either when a supposed ‘break-even’ point was quoted for the properties. If these very real costs were taken into account, the financial outcome would be even worse.

Renovating successfully is also about more than just the sweat and tears of turning an ugly duckling into a swan which is what these shows focus on. In the real world, not every run-down house is a good renovation candidate and it all comes down to accurately crunching the numbers before you even think about getting out your cheque book. Seasoned renovators know that there are three numbers that must stack up – (1) the purchase price, (2) the total cost of renovating and (3) the projected sales price. If any one of these figures is off the mark, any potential profit will quickly dwindle away.

In the case of these renovation shows, the lackluster sale results are most likely due to mistakes in one or more of these three areas. If too much was paid for the properties (note: they don’t need to be overvalued, even market price can be too much for a renovation project), then even if they got the other two aspects right they would probably still be up for a loss. This information is something we aren’t usually privy to when it comes to reality TV so we can only guess whether this was a contributing factor.

I believe many of the properties went wrong by spending too much and overcapitalising on their renovations. As an investor, you should spend what you need to spend to meet the market’s needs and turn a profit, not to meet a pre-determined budget. In some cases, the contestants may have found that spending less and doing a more pared back renovation without the expensive structural changes could have made some of these properties profitable.

The last area that worked against some of the contestants was their final sales price estimations. It became clear that many of them had over-ambitious expectations, with some even predicting their house would break records for the area (a risky strategy at the best of times, let alone in today’s market). This is a sure sign the contestants started becoming emotionally involved with their project, a big no-no. You will only ever receive what the market is willing to pay and in virtually all cases it was nowhere near their estimations. This doesn’t just leak away your profit, but the belief leads you to overspend further on your renovations which can make the situation worse.

If these renovation shows got you excited about starting your own project, then that’s great. But remember that renovating property successfully is not as easy as picking up any old tired property, slapping some fresh paint on the walls, transforming it into a modern masterpiece, and then selling it off for a profit.  Reality TV is about entertainment not education so get your inspiration, but make sure you mix it with a good dose of ‘real’ reality.