Are Rising Cost Of Materials Impacting Renovations?

Jacob Field Published by Jacob Field on 23 March 2022

Do you see rising costs of materials impacting, affecting the renovation process and end projection?

Yes, I do. And it has dramatically.

Has it changed what we’re doing? Not really. Okay.

So give you an example in Perth ,Perth from October to about two weeks ago when I spoke to the building and contractors and relationships over there.

They said on the average renovation or building material costs and trade costs have gone up 18-22%.

Alright that’s in six months, even less than six months. And that was 18-20, more than the October before.

Right.

So you’ve had trading material costs going up like this?

Um it has squeezed margins through renovation processes. Right two years ago we were target properties that had a 2. 5 to 3 times multiple on a renovation spin.

You put a kitchen in for 15,000. You know, you’re expecting it to add or you put a kitchen in for 10,000 alright. Or 9000 or 8000? You’re expecting it to add 25-$30,000. Now you’re putting a kitchen in for 15k –  $16,000. You’re still expecting it to put on the $25-$30,000.

That’s how it’s impacting and fundamentally changing investment. All right. But it’s also creating opportunity. All right. It still is creating opportunity if you can do renovations. If you can find someone to do that work, then you are far ahead of the majority.

You know, a common conversation. If you pick up the phone with the builder, can you come and do this work? It’s like, no, I’ve got a line up of jobs to do for the next 12 months. Um, you know, one thing that we have and pride ourselves on his relationship so we can get jobs done alright.

And that’s really important. That allows you to refinance and to do and if you can, you’re far ahead of the pack because you’ve now got a good quality renovated property in a market. That’s what people are demanding and you have that really strong rental demand, um, new builds, it’s written off, you can’t touch it, you know, 2, 2. 5 years ago, ones into twos.

That was a very common and profitable strategy that we would employ. It just doesn’t have any margin in it now. And that’s two pronged. Obviously you’ve got material and trade costs going through the roof, but you’ve also had building grants. So you’ve had, you know, small builders buying blocks, subdividing and then selling the land as a house and land package to first home builders.

And then they get the job, they get the work and they are falling over themselves to buy these development blocks. And they’ve squeezed margins all the way up and there’s nothing left right there, essentially deriving a wage from it without any profit. And you can’t compete against that as an investor.

You have a different cost base. I definitely do see it impacting the industry overall, but it does create opportunity, we have to cost control. And the main thing for us is if we’re going into an area, we assess the cost of a renovation and we try and hold that for a period of acquisition right.

The worst case scenario here manual is we buy a property today. Right. And in six or 10 weeks the material and trade costs have dramatically changed. Okay. We’ve got to be able to pull costs back and hold that. Hold that line for a three month period of acquisition and renovation. When you can do that.

It actually, you know, you can do something that is very difficult to do and it’s not possible in the wider market and that’s got a lot to do with, with working with us to be perfectly frank. But that means you’re light years ahead of the other people that you’re the only ones putting in a nice fresh renovated property for rent in that market and you have the ability to charge a premium for that.

Okay, refinances it all eases that process. So look, it’s probably, we’ve been through the worst. This is my opinion. You know, seeing it on the ground, we have probably been through the worst. This was a very common question a year ago.

Right. Um, that was when the crunch occurred. Um, that’s when there was sort of mass shortages of materials. It has eased somewhat and I don’t really see it getting much worse in the shorter term. Okay. That’s just my opinion. Um, yeah, hopefully that answers your question there, sir.