One of the biggest risks when renovating a property is overcapitalising; i.e. when the money you spend on improvements is more than the value those improvements will add to the home. This can result in needing to hold onto the property for much longer to realise a gain.
Here are some strategies to keep in mind when you renovate to ensure you aren’t going to overspend!
- Start with the numbers! To make things simple, look at the price difference between a renovated and unrenovated property (similar to each other in size and location). If there’s not enough difference in value between the un-renovated and the renovated properties, you’ll probably overcapitalise no matter what you do. Work out what the renovated property will be worth, minus your buying costs, renovation costs and holding costs, and allow for your profit. If your strategy is to buy and hold, this should result in your maximum buying price. If your strategy is to flip the property (renovate then sell straight away), you will also need to factor in selling costs and the loss from any capital gains tax implications.
- Make sure you research the local market to ensure your standard of finish is what local buyers are looking for. Most people think the risk is in not having good enough finishes, but you can also have finishes that are too expensive for the market. There’s no need to do kitchen Caesar stone bench tops if laminate will do.
- Property selection. Some properties don’t require TLC, they require TNT! Keep your eyes open and your emotions under control. Too much money gets spend on the “dream” but if the property hasn’t got good bones, i.e. fittings, stumps, framing and roofing, you should be walking away, you should be running. If the floor plan is wrong, replacing kitchens and bathrooms will definitely result in overcapitalising.
- Budget – monetary. How much money do you have to renovate? How much have you got as a buffer? It’s a good idea to work backwards because limited funds equals limited renovations. As a rule, estimate your renovation costs at around 5% of the purchase price on the property; however, this will vary depending on the purchase price, the location and the local market. Purchase a renovator that suits your budget.
- Budget – time. The other budget is the time budget. We know it’s cliché but time is money, as they say. The best way to keep you and other tradespeople on time is using a Gantt chart. List all work down the left-hand side of a page and dates across the top. This way you can easily map out your timeframes and check whether your renovation is on schedule.
- Don’t waste your time and money on the little items. Look for the big-tick items that can stop you overcapitalising. For example, painting is a big-tick item you can do yourself to keep costs down and has a quick add-value concept. Buy bulk, use an airless spray and complete the internal paint in one day.
- Recycle everything. For example, why throw out a good window just to go and buy another one? Keep it for another opportunity.
- If it’s not broken, don’t fix it! If you’re thinking about removing something because you don’t like the look or colour of it, just repaint it or add something to it to keep it looking fresh. Look for all those areas that can benefit from a touch-up. Why get a brand new kitchen door when you can get new kitchen door furniture instead?
- Don’t renovate to your own taste. This is particularly important if you have a unique style. Understand the typical buyer/renter and their needs and tastes and renovate to make your property appealing to the mass market. This will ensure your property will attract a wider pool of prospective tenants or buyers.
The finish line
- Elbow grease. Get in and do more! You might need to put in a few extra hours yourself or pay for some extra help along the way. This will help you avoid having the renovation drag on for days, weeks or even months, which will end up costing you more and more money.
- Be flexible. Get outside when the weather is nice and complete the renovation elements that are weather dependent when you can. It’s all about being efficient with your time, minimising cost and time and maximising your profit.
Renovating a property has the potential to provide you with a capital gain and/or a higher yield on your investment when done right. Unfortunately, many people get caught in common traps and spend more than they need to and overcapitalise on the renovation. Using these tips, you will be better positioned to minimise your costs and maximise your gains by renovating.
Get in touch with the Red & Co team if you have any questions about financing a renovation or would like some more tips on getting the most out of your property.