The seven-step plan for renovating in the new year
The secret to renovating for profit is in selecting the right property, conducting thorough research and having a good plan.
It is important that the type of renovation projects you attempt is in line with your level of knowledge, skills and tradespeople contacts.
There are literally hundreds of improvements, big and small, that you could do to increase the value of their property.
By using some common sense I believe most people can handle a basic rejuvenation without too many dramas.
The trick is to add more value than the actual cost of the improvements.
This is my seven-step plan to renovate properties for profit:
Step 1: Understand the renovation profit formula
In simple terms the renovation formula is: Your renovation profits margin equals the renovated value of the property minus the purchase price and total renovation costs.
Once you understand the theory you’ll see where the profits lie. The formula is like the filter through which you view a property.
Step 2: Work out how much you can afford
You need to have enough saved to cover the three major costs of renovating: the cost of buying the property, the cost of renovating the property and the selling costs or the ongoing costs to hold the property.
Step 3: Target the right type of property
Match your risk profile to the right type of property. Before buying a property to renovate it is important to consider your risk profile carefully, including how comfortable you are with the possibility of losing money, or that the return on investment may not be as high as you had hoped for. If you’re new to property investing and/or you’ve never renovated a property before, I recommend you cut your teeth on a simple project. Start off with an apartment – it’s better to start small to minimise your risks.
Step 4: Market research and preparation
This involves identifying suburbs with the greatest profit potential, researching property values, brushing up on design and decorating, and selecting a team of quality tradespeople.
Step 5: Select the right property type
Look for a property with the maximum profit potential. Your first consideration here should be the condition of the property. Search for something rundown, but not totally derelict.
Step 6: Pay the right price
Work out the maximum you can afford to pay and still make a healthy profit. One of the fundamentals of renovating for profit is that you buy well. I always begin with the end in mind, by that I mean I work out what the post-renovated value will be, the costs to get it in that state, calculate the holding costs, decide on the amount of profit I want to make then I know my maximum purchase price.
Step 7: Get the work done on time and within your budget
Avoid profit-shrinking cost overruns and delays. Make sure you use a spread sheet to
schedule the works. You need to ensure all the tradespeople do their work in the right sequence. Always add a buffer of a day or so around each tradesperson. This gives you wiggle room if there are delays.
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 and The Insider’s Guide to Profitable Property Investing.