How to renovate for profit
The ultimate aim of renovating is to increase a property’s value and therefore increase your capital growth. However it takes more than simply painting a wall and watching your property grow in value, it’s about carefully making decisions, both financially and strategically, which will ultimately help you reach your property and financial goals. This begs the question, what is your goal? It’s important to know your objectives from the outset.
Here are five helpful tips on how to renovate for profit.
- Understand your objectives and outline your strategy
Renovating without a set of clear objectives is like driving with your eyes closed – you’re never sure which direction to take. Having objectives and a strategic outline will enable you to stay focused and make rational decisions, as well as stick to your budget and timelines.
Are you looking to increase the equity in the property so you can use it to invest in another property? Are you looking to increase the property’s capital growth in order to sell? Or are you looking to increase the rental return from the property?
Knowing from the outset that your objective is to add value in order to sell the property, for example, will ensure you don’t overcapitalise or become too invested in features you like, which ultimately may not add value.
Making sure all parties including partners, tradesman and suppliers are all on the same page will help to ensure everyone is working together as a team.
Investment property is a long-term financial solution which provides unique opportunities to each individual. It’s imperative to do your research and engage with key professionals before renovating to understand the best way forward for you and your circumstances. Adequate research will also allow you to plan and budget more realistically.
Research will also enable you to make decisions that are in the best interest of your financial situation, objectives and overall strategy. For instance, making a decision as part of your renovation that future tenants or buyers won’t need or be interested in would be a waste of time and money. Knowing your demographic and who you are renovating for is key to making smarter decisions.
- Purchase & Planning
Once you have compiled a comprehensive set of objectives, overall strategy and helpful research, its time to start planning your purchase (if you haven’t already). Find a property that is fit for renovating within a timeframe that you desire.
As the saying goes time is money, and that has never been more true than during a renovation. The below graph is an indication of the benefits of hired help, as opposed to attempting to do everything yourself to ‘save money’.
Source: Elizabeth Gatlin, 2016: http://elizabethgatlin.com/is-it-worth-that-questioning-the-real-estate-investment/
- When possible, outsource to a buyer’s agent and/or builders
Despite what The Block may lead you to believe, undertaking a renovation on your own isn’t likely to get you the outcomes you require. By working with the experts including a buyer’s agent, builders and tradespeople, you can ensure you select the right property and make the right improvements without overcapitalising.
A buyer’s agent is a licensed property professional that works on the buyer’s behalf to source, assess and negotiate a property purchase. They are not the same as a real estate agent and don’t have a relationship with the seller. Working with a buyer’s agent can ensure you buy a property that meets the needs of your strategy.
Working with experienced and qualified builders and tradespeople on your renovation will almost always ensure the job is of better quality, within your budget and completed more quickly than should you manage the renovation yourself.
The key to renovating for profit is finding the sweet spot where you don’t over or under capitalise. If you overcapitalise you may be forced to sell the property at a higher price to cover your costs. It may mean the market is not ready or willing to pay the price for the property you are offering at this particular location. This means it could damagingly sit on the market for months affecting your cash flow and property value perception. Alternatively you may be forced to sell at a loss. If you’re renting out the property you may find the rent that you can receive isn’t enough to justify the renovation investment.
Undercapitalisation means an opportunity has been missed with the property and therefore the full scope of the property’s worth will likely be unmet. This leads to an opportunity cost when selling or renting out the property.
Seeking expert advice during a renovation is also vital to understand the market demands and priorities. It can be hard to renovate without including your personal opinion and preference, but it’s wise to remove any emotion and make logical, financial decisions throughout.
Further to this, sometimes less is more and simple changes can make the biggest impact. There is no point ripping out the kitchen if several smaller cosmetic changes can be made for basically the same result.
- Sell / Rent
Once the renovation is complete it’s time to revisit your initial set of objectives in order to decide next steps: sell or rent. Depending on the state of the market, there are benefits to selling versus holding a property. During this stage, it’s a smart idea to regroup with your financial advisor and real estate agent to determine the best way forward for you.
Contact me today on 02-9522-3000 to discuss your potential property investment opportunities.