What The Data Says About Adding Value - With Arjun Paliwal

You can make huge money renovating and developing property, but this doesn't mean going to the effort of adding value is always right when it comes to every property. In this episode, I'm going to break down what the data says about adding value, understanding the numbers, and trusting them to actually help us make a decision and understand if we're better off turning a well-located asset into more equity using forced equity growth, just letting the market naturally grow in value. I'm Arjun Paliwal, and let's get into it. With all the TV shows, renovation, development, hearing about what your uncle once did or auntie once did, it all sounds very exciting to get into it, right? But there are moments when it does make sense and doesn't make sense.

This is where I'm going to unpack that for you today. So firstly, the biggest thing to consider is that developing and renovating property in most, not all cases, takes time. There is decisions around what you're going to develop, what potential is there. Same with the cosmetic renovations, even if it might not have as much potential uncapping from third parties such as, you know, councils or town planners and surveyors. You're now down from a cosmetic renovation to what depth should I renovate it?

Do I go all in on kitchens, bathrooms, paints? Do I just do a couple of cosmetic things? All this decision making takes time. The second part from time is not just decision making, but it's execution. And the last part from time is not just execution, but it's actually other moves that you could have made.

When will you have rental income start coming in versus when you don't have rental income? And when will you actually have the ability to extract equity if you have done a good job to extract that growth? So time is a big factor to consider. One thing that I've noticed many people do is when it comes to the development side, not just renovation, is that they can go through one to even three year periods. With one to three years, the bank may limit them to many other acquisitions that they could have made to now only the one or two because their capacity stuck on something that isn't technically receiving a rental income or they have a lot of headspace used in that asset to hopefully make it work and get it done right.

So acquisition timelines slow a lot when you go down this path. The same can exist with renovation. Remember, there's lots of professionals, lots of people you're calling, lots of decisions being made, lots of project managing. And so as a result, if you're not jumping on it with a time in mind, you could also delay the opportunity cost there. So that's the first part to consider.

And many people actually don't consider that because it's hard. You know, do you think you may purchase a second property in three months or six or nine? Some people don't know. And because they're unknown, they go, well, I'll just focus my time on developing or renovating it. So that's the time aspect, right?

Now, the other part is time in another way, which is time in the fact that you think you made 20 percent, say, gross margins on a development project or even just say you had 20 percent improvement in your end value from renovation. If that took a certain time, what that is, is not 20 percent in isolation. It could be, say, 21 percent over two to three years is now 7 percent per annum. Right. So how much of that 21 percent also was market growth versus actual development or renovation growth?

That's another thing people forget. For example, I've seen people renovate in the city of Townsville thinking that they had great growth and great outcomes. But what they didn't realize is that the city was actually growing at just over 2 percent per month anyway during the year of 2024. So now you've got 2 percent per month growth anyway. It's almost 24 percent in capital growth for the year.

People are celebrating that 20 percent increase in renovation, not realizing that most of it actually sat or all of it sat from the growth itself. What renovation did in that scenario leads to my second point, which is the actual renovating for growth or renovating for income. And that's the thing many people confuse because there's such high growth markets that people grab renovation properties in. You might not actually be renovating for value growth. You might be renovating for income growth, which is the rental yield.

For example, if you have a rental yield that's lower because the property is less rentable in the condition it's in and then you do increase the value with most of it being from the growth of the market and say some from the renovation, you could end up with a rental yield that's far better now because the property is much more presentable. So this is a scenario where renovation does add value, but in different ways to not what you're always thinking. It now just improves the rental yield, improves the rentability, and it also improves the rental speed in future because it's actually a better looking property with more going on. This is another consideration that people don't always think of, which is renovating and how it can help your portfolio from the actual rental sides of things, not just value. But if your goal was to gain value and you attributed too much of that Townsville example to renovation for value growth, it really wasn't.

It was more the market growing and what renovation did for you is increase your yield on purchase. Right. And to give you a quick calculation on that, let's just say you bought a property for 500K and it rents for $400 a week. That rental yield is lower. But if you spend only 20K now on renovations and now your total cost is 520, but it rents for 520 a week, the rental yield is now 5.

2%. So all of a sudden you've increased rents at 120K. You've increased rents by $120 per week. You've only spent 20K in the improvements. If you isolate the house completely, that's a 20K investment giving you $120 a week, which is wild.

That's a phenomenal yield. Right. So that is where renovation is something you should look into as well. Not from the perspective of just growth, but look at it from renovation with growth and rental income changes. Those are some of the considerations.

Time when it comes to renovation and how that can impact you in opportunity cost, money lost and actual measure of growth. How much was it the market versus the actual growth of the renovation? The second part is considering the X factor that renovations can do, which is rental income and rental yield increases, not just value increases. But the last thing to consider is looking at data in a different way to see if your renovation was actually effective. So I'm going to give you an example of an effective renovation and one that's less effective just with a few stats from resale calculations.

So this first property is an effective renovation. So this particular property is in the suburb of Holland Park in Brisbane, and this property had some renovations done to it. Now, with this particular renovation, you can see here that the actual price was sold from the resale amount to be 35 percent higher since purchase. But the actual suburb average growth was 25 percent. So there was an increase in resale value when it comes to the suburb growth in comparison to the resale value from how much that person purchased it for.

What's unknown, though, is how much they spent for the renovation and was it enough to make up that actual resale value growth. But nonetheless, 10 percent in comparison to the suburb average is still a great improvement when it comes to resale value growth of a renovated property versus resale value growth of the suburb typical average. The key will always be to understand what they actually spent and if it outweighs that gap. But in this particular case, we'll assume that's the case and we'll see that you can actually sell for greater than the average of the suburb. The next part now is an ineffective property.

And this particular property is in WA in the suburb of Stirling. There was two and a half years between resale value and there has been a renovation that's taken place on this property. What we can see here is that the property grew 26 percent in value from the sale price to the resale value sale. Now, funnily enough, the suburb has actually only increased 25. 6 percent in value over that same time period, which means that if there was a resale value increase, it actually has been negative for them because there would have been money spent to then sell it.

But the actual sale price is in line with the suburbs growth anyway. That means that the renovation that they did was spending perhaps for the holding period, but it wasn't actually any spending that had a profit side of it. What would have been a profitable outcome is if the resale value growth was higher than the suburb value growth and the renovation costs input. But in this case, if this renovation is done and it's sold for as much as the suburbs grown anyway, and you actually haven't seen any profitable growth to such a large level that you'd expect when you're renovating a property. So this is where you can have examples that go well and don't go well, even if it may look better than the initial property doesn't mean it necessarily made more money.

So those are examples of end state revaluations or resale, which, in my opinion, is much more important to consider because resale value captures what the market thinks about the renovation, not just a bank valuation. Right. But there are other things to consider that can help and how you can get some quick wins. So the first thing is your portfolio consideration. I mentioned earlier in point two about renovation for the purpose of rental yield increasing.

That is a great advantage because if you increase yield on purchase, you now get better borrowing capacity. You also get a better tenancy position, meaning it's faster to rent and you're likely to attract the best possible tenant with a fresher property.