Do you want to make a profit of property renovations?
You’re not alone. Currently many property investors are turning to renovations to add value, but when they do the sums at the end of the renovation project, some are disappointed with their lack of profit.
As our team at Metropole has been involved in many successful property renovations, so I would like to share some “insider tips” on how to make predictable property renovation profits.
Firstly I would like to explain that, despite what some people would have you believe, it is very, very difficult to make money out of a buy, renovate and sell your property strategy.
Just look what happened on those TV shows like The Block or Renovators. When you take into account all the costs including agent’s commission, GST and tax there is so little profit left over that many renovators wonder why they took the risk of undertaking a renovation project.
However, what works really well, if done correctly, is a buy renovate and hold your investment property strategy.
Here you buy a property with renovation potential, renovate and then keep it as a long term investment having added value.
This added value will give you improved rentability – your property will be more attractive to a wide range of tenants – as well as achieving a higher rent and you will have “manufactured” some equity. In time you should be able to refinance against this extra equity, pull out some or all of your funds and use them to buy your next property and start all over again.
But as I have already explained, at the end of the day, most renovators don’t do well out of their projects. One of the reasons this occurs is because they pay too much for their property in the first place.
The importance of buying well.
Not only do you have to buy the right type of property, it is important to buy it at the right price. One that underpins your renovation project’s profit.
So how do you know how much to pay?
To make sure you make a profit from your renovation project, I find it easiest to work backwards to arrive at a fair purchase price.
Firstly determine your estimated value of your property for after you’ve improved it. Look at comparable sales in your area, determine whether the market is going up or down, and understand exactly how much your property will be worth.
Then, total up your projected expenses. These generally include:
- Purchasing costs – including stamp duty, solicitor’s costs and loan fees.
- The cost of the renovation – try do only cosmetic work that can easily be seen, rather than structural works that tend to be expensive.
- Outgoings during the renovation process – including rates, electricity, insurance and interest.
- Hidden costs – depending on the age and condition of your property, you can expect that something unexpected will go wrong – that’s why we stick to buying apartments in sound buildings that tend to only need cosmetic makeovers.
Finally, subtract your projected expenses from your estimated sales price.
For example, let’s say that you realistically expect the end value of your renovated property to be $600,000 and your projected costs are $40,000.
That means the maximum sum you should pay for the property is $560,000, otherwise, the deal makes no sense.
Actually, you should buy the property for far less than that. After all, you are investing in real estate to make money. If you are not making money, what is the point of going to the trouble to undertake the renovations?
Of course the renovation process also needs careful planning. We have seen so many seemingly simple renovations come unstuck when the renovator doesn’t carefully plan and cost the renovation prior to starting.
Ensuring that your costs are minimized and your program is tightly controlled are essential elements of any renovation. Careful scrutiny of suppliers and supply times, availability of skilled trades to keep the job on track and on time and maintaining quality and finish standards, eliminating reworking and delays are also critical to ensure the renovation actually works.
A case study
A great example of maximising your profits through property renovations is a purchase we made recently on behalf of clients of Metropole who initially attended one of our free property briefings.
This young married couple were buying their first investment property and had been considering an off the plan investment. Thankfully, after speaking with us they changed their minds and we helped them to secure a 2 bedroom apartment in the inner city Melbourne suburb of St Kilda East.
Located on the ground floor, the property boasted its own large balcony leadiong to a common courtyard and a renovated bathroom, however some TLC was needed to bring the remainder of the premises up to date.
We assisted the clients with a full refurbishment, including new kitchen, repainting, installing blinds and polishing the hardwood floors at a total cost of $35,000.
The property was purchased last October for $520,000 and the current market value is in excess of $600,000 based on the sale of a comparable 2 bedroom apartment in the vicinity
The apartment was bought from an owner occupier, but the rent prior to renovations was estimated at $360 per week. After modernising the premises it’s currently tenanted for $430 per week and by outlaying $35,000 on improvements, the clients have enjoyed an increase in value of around $85,000 to $100,000 within 6 months.
Now that’s a smart property investment strategy!
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