It’s easier to buy and sell properties that are in great condition – this is what buyers gravitate towards. However, when managed correctly, renovating can reap great rewards for investors.
It’s true the market for properties that need work is hotting up, but there is still less demand compared to newer or restored properties. Not everyone has the time, money or inclination to perform renovations. This in turn can drive down the price of properties and increase profits for buyers willing to coordinate a few simple repairs.
At the same time, there are risks you need to be aware of – renovations require careful planning and execution. Here’s what you need to know:
1. Choose properties that need mainly cosmetic work.
Avoid properties with structural damage, as this is often when expensive problems occur. Leave that part to the experts.
2. Find a valuer.
One of the biggest misconceptions investors have is that the more capital they spent on a property, the more profit they will make. This isn’t always the case. A valuer can tell you if your $50,000 kitchen renovation will actually add $50,000 to your home’s value.
3. Use a project manager.
There are too many risks involved in managing a project alone. Some tradespeople capitalise on investors’ lack of experience – in terms of cost, timelines and attention to detail.
Handling the renovation yourself could save money initiall, but hiccups along the way might turn your $40,000 renovation into a $60,000 – $80,000 job in the long run – not to mention the added time, which is usually about two months compared to four weeks if you had brought on experts.
Make sure you choose a good project manager who will have experience in completing renovations on time and within budget.
4. Be realistic when doing it yourself.
If you are adamant about DIY, be aware most novice renovators go under budget when estimating the costs. My tip is to double your expected cost and then work out if you’re still going to make a profit. Unavoidable costs often arise from unexpected structural flaws in the property.
When renovations work well:
If you’ve done your research, if your investment property is purchased well, if the renovations are done correctly and with the right advice, tens of thousands of dollars in equity can be made in the first year alone.
Should I sell for a profit now, or hold on to the property?
With such high transaction costs in property, even if you do make a small fortune by renovating, you may lose the majority of it in selling costs, stamp duty, capital gains and buying into the next project. Work the numbers, as often by refinancing you can hold onto your profits and buy another deal. Is it worth making $100,000 to end up with $25,000 in your pocket?