Why it is easier to NOT make a profit than it is to make a profit from renovating.

Renovating a property is a risky business, particularly since the entry and exit costs are so high, never mind the purchase price and build costs. In recent years we are seeing fewer and fewer people getting back a dollar in increased value for every dollar they spend. This may be fine if you are renovating to create your dream home, but not if you are an investor. Yet so many people are still being seduced by the idea of renovating for profit.

It’s also complicated and there are no fail-safe formulas for success. I don’t believe in oversimplified formulas such as “a kitchen should cost 2% of the property’s value”. Maybe it should, but then again, with this restriction, it may fall short of the standards expected by prospective buyers. Or what if the kitchen is in the wrong spot? Simply replacing it could actually end up devaluing the property rather than enhancing its value.

renovatingSo, what do you need to succeed? You need to get the following right:

  • An appropriate property
  • The purchase price
  • Experience
  • Tradespeople
  • Finance & cash flow
  • Tax advice
  • Market knowledge
  • Time management
  • Market conditions

And then you need to make sure that the improvements cost less than the value gained. You don’t want to overcapitalize, yet you also need to make sure you don’t undercapitalize.

Not all “renovator’s delights” are simple to improve. If the floorplan is all wrong you are going to spend a whole lot more than you would if all the walls and plumbing are in the right spots. If the property has been poorly maintained for years you are going to spend a lot of money in areas where you will see no immediate improvement. The maxim has to be: minimum spend for maximum gain.

Look at what price range has the most volume of buyers in the suburb. Make sure that the end product will fall within the most popular price bracket. For example, if 50% of the buyers are paying between $800K and $1M for houses in the suburb, it might be a good strategy to pay $600K for a dump and spend $200K renovating it. But it may not make sense to pay $900K for a renovator’s delight and spend $300K turning it into a dream home which will appeal to only 10% of the market. What we are looking for here is the highest probability of future buyer demand.

With so many elements to consider, it is no wonder it is so easy to lose money on a renovation.

The building blocks you need are:

  • Know your market
  • Know your resale values
  • Know what the buyers want
  • Know your costs
  • Build in a buffer
  • Gather a team of advisors
  • Consider renovating to rent rather than sell
  • Don’t rely on market growth for your profit margin

It is crucial that you buy the right property in the first place, not all houses and apartments are potential gold mines. Then watch what you pay for the property and how much you spend on the renovation. You can spend too little or too much. Make the reno appropriate for the buying public. And never lose sight of your end buyer.

Published:-  17 April, 2013

DISCLAIMER:

Please note: Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.

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