You may not have to be a seasoned renovator to spruce up landscaping, freshen paintwork or replace flooring, but knowing how to locate a renovation gem and improve the overall value of a property for a particular area and demographic demands careful research, planning and budgeting.
Consulting the right professionals can help you plan and execute a renovation that will satisfy your strategy in adding value, appealing to a certain buyer and generating a healthy profit margin.
How to renovate for profit
Like any investment strategy, there are some risks that come with the “renovate and flip” plan. The greatest risk is that you may be unable to sell the property for a profit, or you may not be able to sell for the profit margin that you seek. Factors affecting this outcome range from purchasing the wrong property type, purchasing in the wrong location or lacking efficient plans.
To manage these risks, be realistic not only about your budget and profit margin as well as the time and planning of your renovation project. Enlist the services of professionals such as a contractor, an accountant, a financial planner, a home appraiser, a mortgage broker and a local real estate agent to ensure that you don’t blow out your budget or make the wrong purchase or finance decision.
When inspecting the property, get a building and pest inspection to identify any structural problems, as this may offer you greater negotiating leverage if you decide to proceed with the purchase.
Consider whether you are planning to buy, renovate and sell or whether you want to buy, renovate and hold. If you’re planning to sell, you want to ensure a guaranteed quick-profit margin. If you’re planning to hold the property for a period of time, then you want to ensure that it’ll benefit from capital growth.
Again, recruiting a team of trusted professionals can help you refine your strategy from the outset.
Know where to add value
Kitchens and bathrooms are important to homebuyers because of their aesthetic appeal and because they’re high-traffic areas. For a cosmetic renovation, focus on upgrading areas that are visible. For instance, you may want to change light fittings or add a backsplash in the kitchen.
A local home appraiser and real estate agent can help you decide which areas are worth upgrading and the return you could expect.
Become familiar with the property price and market conditions of at least three neighboring suburbs of interest.
Research renovated properties similar to the one you’re thinking of buying to estimate a realistic sale price for your property. Look at the historical capital growth rates for the market as well as demand and supply factors, and residential demographics of the area.
You can use sources such as Niche and Neighborhood Scout to generate suburb profile reports.
Once you’ve selected the area, you need to decide which type of property is likely to outperform the market. Speak to a local real estate agent or consider hiring a buyer’s agent to help you better understand the type of property — whether it’s an apartment, condo or house — that will allow you to renovate without overcapitalizing.
Inspect several properties and keep an eye out for any structural problems. Check the electrical and plumbing and look around the windows for rotten boards, as these can be expensive to repair.
Ideally, you should find a property for 20% below the median price for a neighborhood that’s cosmetically distressed — such as poor paintwork or outdated interiors, as this will ensure that it has good renovation potential. You may also want to consider a discounted property such as a deceased estate or a foreclosure auction. These can present strong buying opportunities as the vendor is often looking for a quick sale.
If you need help finding and buying a property to renovate, you can also enlist the services of a professional buyer’s agent.
Professional renovators recommend that you spend no more than 10% of your property value on the entire renovation. For example, if you buy the property for $550,000, then you shouldn’t spend more than $55,000 on the renovation. Make sure your budget accounts for the deposit, stamp duty, renovation project costs, mortgage repayments as well as a contingency buffer.
Your profit margin should be roughly 10% to 15%. You can estimate your profit margin by forecasting your final sales price and then subtracting the original purchase price and renovation and holding costs. Depending on the location and property type, cosmetic upgrades can generate $15,000 to $75,000 in seven to 10 weeks.
Keep in mind that property appraisers can help you allocate your budget across different areas. For instance, a local appraiser may know that if you spend $15,000 upgrading some kitchen cabinetry, then this could add around $25,000 in equity.
A quantity surveyor can also help you understand what you should be paying for labor and materials to ensure that you’re not overcharged. They can also provide you with a depreciation schedule to highlight the deductions you can claim in your tax return.
When comparing quotes, ensure that you’re comparing apples with apples. For instance, if you get three quotes for a tiling job, you want to ensure that all three quotes provide an estimate price for the same scope of work such as waterproofing, materials and labor costs. This makes it easy to compare suppliers when choosing the one that offers the best value for your money.
To help you stick to your renovation budget, you should negotiate with tradespeople to see if you can get a better price. Try to find a one-stop supplier for all your materials so you can negotiate bulk discounts.
Strike up a conversation with a lender or a mortgage broker who can give you access to a panel of lenders and negotiate for a competitive deal on your behalf. A mortgage broker can help you understand your borrowing power and compare different home loan products.
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Time frame and planning
From area measurement to concept agreement and execution, finalizing your renovation project timeline is critical to ensuring project success.
During this stage, you need to determine the scope of the work and break down your timeline and budget into itemized projects. Also, decide whether you’ll manage the renovation yourself or whether you’ll hire a project manager.
You’ll need to factor in the time taken for any administrative requirements for the renovation, such as seeking city approval.
What are some easy projects that can generate profit?
- Painting. A quick paint job can make a property feel fresh, clean and modern. It’s a low-cost and quick way make your property more desirable.
- Curb appeal. Improving the property’s facade adds value and sellability to a property. Enhancing your curb appeal can include basic landscaping, installing a modern mailbox or paving your front walkway.
- Door handles. Suppose you don’t want to replace your kitchen cabinetry — simply replace the door handles of the doors and cupboards to give it a more modern feel.
- Lighting. Replacing the light fixtures is another simple and affordable way to change a room’s aesthetics.
- Window coverings. Replacing window furnishings can make a space feel more contemporary and open.
5 renovating for profit tips
- Do your research. Extensive neighborhood and property research is critical to a successful “buy and flip” strategy. The location, the property and the type of renovation are all important factors to generating a profit.
- Be realistic. When planning, be realistic about your renovation timeline and budget. Also, be realistic when estimating your profit margin — it could make or break your profitability.
- Consult professionals. Build a team of licensed and reputable professionals to help you follow your project plan and budget.
- Buy below market value. Generally, purchase a property that is 20% below the median market value if you want to renovate for profit.
- Cosmetic upgrades. Avoid major structural upgrades and focus on cosmetic and visible upgrades.
4 common mistakes when renovating for profit
- Paying too much. The amount you spend on your property will largely determine the profit that you make from the property. To avoid overpaying, try not to make decisions based on emotion. Recruit a team of professionals to assist you with the buying process.
- Overcapitalization. Blowing out your renovation budget can create cash-flow problems down the track. To avoid overcapitalizing, use a professional appraiser to help you fully understand how to add value to your property. You may also want to talk to an accountant to understand any tax or depreciation items you can claim. Another way to avoid overcapitalizing is to have a buffer of funds in place — normally 20% of your overall budget — for any contingencies that may arise.
- DIY projects. Don’t cut corners with DIY projects. While it may seem efficient and cost-effective at first, if you don’t complete the work correctly, you may end up having to pay more in the future to repair the job.
- Ignoring future buyer. Consider what will appeal to your target audience. Applying neutral designs and enhancing your curb appeal are some ways to maximize your property’s sellability factor.
Finance your next renovation
What are the tax implications of renovating for profit?
If you’re renovating one or more properties, you need to decide if you’re a personal property investor making a profit from the renovation, or running a property renovation business.
For more information about how it affects taxes when renovating for profit, visit the IRS website.
If you’re using a “renovate and flip” strategy, you need to become an expert in the suburb that you’re intending to buy, plus be smart about what you decide to renovate in order to generate the highest return possible.