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I love to renovate. It’s something I would happily do all day every day, as I get a great deal out of it mentally, physically and financially.
The first step in your renovation is something that I was recently talking to a friend about on facebook. He asked me how to start renovating so I gave him some basic information that apparently was something that some would-be renovators hadn’t considered.
The small morsel of information was this: to do a very basic assessment of profitability you need to look at your purchase price, then the maximum like for like sale price you can reasonably expect for the improved property. Then, within that difference, you need to factor in your holding costs (mortgage payments, levies etc.), sale costs (marketing, agency fees, stamp duty if the property requires), renovation costs (labour and materials) and incidentals (renting another property to live in for example).
So here’s the big one: If when you add up all of the costs and subtract them from the difference between your purchase price and a conservative sale price and you still end up with profit, you need to assess whether the amount of money you make over the time it takes you to make it is worthwhile.
It’s a really basic rule of thumb to determine whether you should renovate, and if the answer is YES!, what level of expense you should go to allow a tidy profit.
My main advice is this- detach yourself from the emotional side of renovating and simply look at the numbers first so you can save yourself a lot of trouble in renovating and heartache on sale day.
The idea is to increase your property to its most appealing level, to achieve the highest price, by spending the optimum amount you need to. There’s a lot of nuance and interpretation required to work out what the market will respond to but if you strike exactly the right balance between budget and result it’s extremely rewarding emotionally and financially.
I’m thinking about renovating my apartment right at this moment. The earlier ideas I had about my renovation were grand indeed. I was considering making the living space larger by sacrificing a bedroom with a view to move into the roof space with time.
In looking through the internet whilst doing my research I found that there were no 2 bedroom apartments of a similar age and style to my own that were fetching the prices that I wanted, or near where I paid. The only way to recoup my money and make a profit from the renovation would be to keep the 3 bedroom layout and improve it.
Tip: When you’re looking at improving your property you need to always remember that you will never out-perform the market. By this I mean, unless you can demonstrate that there are properties in the same area, with the same floor space, and the same appeal be it views, location to amenities, sunlight, entertainment spaces or the like, in the same price range as you would like to achieve, you will have nothing to show agents to value against when you need to sell or bank valuers when you want to gain access to equity.
Work out what the market desires in the immediate vicinity of your property and slightly exceed it in terms of finish and design.
So in my example I could expect the best result by keeping my 3 bedrooms but I noticed that the apartments that are achieving the best results also have 2 bathrooms. My apartment has only one. So that is clearly the first point of improvement. The good news is that I have figured out a way to use the existing plumbing to make 1 bathroom into 2 and improve the layout of the apartment in the process, which I’m sure will pay handsomely when it comes time to sell.
Stay tuned. I’ll keep you posted with my progress and expert advice.
Darren Palmer’s check list for a profitable renovation:
1. Work out a reasonable maximum sale price
2. Know your expenses
3. Be sure the time it takes you is worth the money you make
4. Source plenty of like for like comparison properties
5. Know what your target market is wanting
6. Work out what you need to do to slightly exceed their expectations
7. Figure out what is the most appropriate spend to achieve the best result
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