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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.
Like any investment strategy, there are some risks that come with the “renovate and flip” strategy. 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 set out to achieve. This may be a result of purchasing the wrong property type, purchasing in the wrong location or not planning efficiently.
To manage these risks, you need to be realistic not only about your budget and profit margin but also about the time and planning of your renovation project. You should 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 purchasing or finance decision.
When inspecting the property, it’s a good idea to 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.
You need to 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 that a quick profit margin will be guaranteed. If you’re planning to hold the property for a period of time, then you want to ensure that it will benefit from capital growth.
Again, recruiting a team of trusted professionals can help you refine your strategy from the outset.
Kitchens and bathrooms are important to homebuyers because of their aesthetic appeal and because they are high-traffic areas. For a cosmetic renovation, focus on upgrading areas that are visible. For instance, you may want to change the light fittings or add a splashback to the kitchen sink.
A local home appraiser and real estate agent can help you decide which areas are worth upgrading and the likely return that they will yield.
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 so you can 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 the demographic of residents in the area.
You can use sources such as Niche and Neighborhood Scout to generate suburb profile reports.
Once you’ve selected the suburb for your property, 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 the suburb that is 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, which 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 the cabinetry of a property, then this may 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, you need to 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.
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. You’ll also need to decide whether you’ll manage the renovation yourself or whether you’ll hire a project manager (for major structural renovations).
You’ll need to factor in the time taken for any administrative requirements for the renovation, such as seeking city approval.
If you’re renovating one or more properties, you need to decide if you are a personal property investor, undertaking profit-making activities from the renovation or carrying out a business of renovating properties.
For more information about the treatment of tax when renovating for profit, visit the IRS website.
If you’re pursuing a “renovate and flip” strategy, not only do you need to become an expert in the suburb that you’re intending to buy, but you also need to be smart about what you decide to renovate in order to generate the highest return possible.
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