The top six profit-killing mistakes to avoid when renovating
Over the years I’ve noticed several common traps that renovators fall into. From not conducting enough comparable market research to thinking you have to do all the renovation work yourself in order to make a profit. There are numerous pitfalls that can eat into your bottom line and destroy your confidence. Here are the top six mistakes to avoid.
1. Not doing enough research
I can’t overemphasise the importance of undertaking comprehensive research because it’s fundamental to each and every step of the renovating for profit process. When you boil it down, every one of the following mistakes can be avoided by doing research.
The vast majority of the effort involved in renovating for profit is research and preparation, but so often I see people rushing in, thinking they know it all, and ending up with a disappointing result. If you don’t take the time to cost your renovation accurately, you could end up with a half-renovated property and no money to finish it. If you don’t do enough comparable market research you could overestimate the value of the property post renovation and get a nasty shock when you go to sell.
Renovating for profit requires time, effort and dedication. The time and effort you put into research will ultimately determine the amount of profit you make.
2. Paying too much for the property
The purchase price has a direct impact on your profit margin. Every dollar you negotiate the purchase price below your maximum is another dollar of profit for you. However if you set your maximum purchase price too high (because you didn’t do enough research to understand fair market value), or you exceed it (because, for example, you lost self-control bidding at an auction), your profit will suffer.
Purchasing at the right price to ensure you make a profit comes down to knowing market values and negotiating well. All too often I see property investors taking short cuts on the research and market analysis and not bothering to hone their negotiation skills. In the end they pay too much, don’t end up making a profit and don’t maximise the return on their investment. Remember if you’re not experienced at something (for example, tiling) then outsource it!
3. Not renovating for the target market
If you’re renovating your own home it’s all about pleasing yourself, however when you’re renovating for profit it’s about appealing to the target market, i.e. tenants and buyers. Unfortunately many people get this wrong. They let their “know it all” attitude get in the way and decide what they like is best for everybody.
How many times have you walked into a property for sale and been appalled by the décor? I can assure you it happens to me all the time. Anyone who wants to buy such a property will reduce their offer by the amount they’ll have to pay to have the place redecorated to their taste. So you can see how getting the décor wrong can easily erode a renovator’s profit.
It’s always safer to go for a conservative, neutral but classy décor that’s appropriate to the local market and will appeal to the masses, not the few. If you’re not sure how to achieve that result, get professional advice from an interior designer. I’ve always found this kind of advice a very worthwhile investment.
4. Over (or under) capitalising
When you’re renovating for profit, adding value is the name of the game. Unfortunately you can’t add unlimited value to a property because there is a limit as to what the market will pay for say a four-bedroom, two-bathroom, double lock-up garage house. Once a home has reached its ceiling price for the accommodation it offers, buyers will not pay more. It doesn’t matter how much Italian marble, state-of-the art electronics and gold-leaf ceilings you put in it.
I know I’m sounding like a broken record here, but it all comes back to your research. When you’re undertaking comparable market analysis you need to establish the ceiling price of fully renovated properties that are similar to the ones you’re targeting. To avoid overcapitalising, prioritise your expenditure on improvements that will add the most value. Be mindful of the price ceiling and resist the temptation to overspend.
It’s also possible to go the other way and under-capitalise on a renovation. This usually happens when you’re trying to save money. For example, you put in a cheaper kitchen with laminate benchtops but the target market prefers a much higher-quality kitchen with CaesarStone benchtops and European branded appliances.
So they lower their offers to take into account the cost of re-doing the kitchen to what it should be for a property of its style, position and character or they dismiss the property from consideration altogether because renovating is too much of a hassle for them. Either way, it’s bad news for you.
If you don’t have the budget to renovate a property to the standard the target market expects then it’s better to set your sights on a more affordable property that you can renovate properly. Otherwise wait until you’ve saved more money.
5. Relying on the sales agent’s opinion about renovated value
Here’s another reason why you have to research the prices of renovated properties for yourself. You can’t rely on selling agents to give you an accurate estimate of the renovated value of a property. If you ask them what a property would be worth when it’s renovated they’re more than likely going to give you a very optimistic estimate.
Why would they do this? Well, apart from the fact that it’s in their nature to be very bullish with sale prices as no one wants to list their property for sale with a pessimist, it’s also in their vendor’s financial interest. They want to paint the property in the best possible light to encourage you to make an offer on it. The other problem is it’s also an unqualified estimate as they may interpret what you intend to do with the property as more high end than you actually intend to do.
6. Doing the work yourself to “save money”
If your budget is small there’s always a temptation to do some or all of the work yourself to save money but DIY renovations can easily backfire. If the quality of workmanship is substandard this will diminish your sale price, possibly eliminating any profit you might have made in much the same way as under-capitalising on a renovation.
It’s also a false economy. You might save a few bucks on the cost of the renovation, but how much is your time worth? The time it takes you to paint walls and sand floors could be better spent looking for another deal. Plus, the longer it takes you to renovate, the more you’ll pay in holding costs. Why not just hire professionals to do all the work? Especially since you can still make a healthy profit without picking up a paint brush.
Patrick Bright is a real estate author and founder of Sydney-based buyer’s agency EPS Property Search. Bright has purchased over $500 million worth of real estate for clients. His best-selling titles include The Insider’s Guide to Buying Real Estate, The Insider’s Guide to Saving Thousands at Auction, The Insider’s Guide to Profitable Property Investing and The Insider's Guide to Renovating for Profit. This is an excerpt from The Insider's Guide to Renovating for Profit.