Renovating Property for Profit
MANY people decide they would like to make money from renovating a property. There are obviously many tips and tricks surrounding this evolving income stream.
This article is the starting point to help you make the most of the decision.
Tip 1. Education: Educating yourself about renovation is becoming easier – there are books, DVDs, seminars, CDs and websites that offer ready-made information.
You can even watch TV shows like Better Homes and Gardens to get tips. It is also advisable to talk to people that have done it before and even find someone that can mentor you through the process.
Tip 2. Build your team: Every renovator needs a team of people to help them through the process.
I would suggest you should have access to the following: a lawyer, an accountant, a building inspector, a real estate agent and a variety of tradespeople.
With your lawyer and accountant it is important to set up your tax/company structures before you start. There is a lot to be said for maximising your potential profits.
It is important that you interview the members of your team to ensure they understand they are part of your team – whether you do one project per year or five.
It is worthwhile incentivising the members of your team, with additional payments for on-time or better service.
Imagine how much better service you might get from a real estate agent if you offered them a 5% commission for a sale in less than 2 months and then 2.5% for over 2 months.
The theory here is that it is better to pay the people in your team than the bank that might be charging up to 9%.
Tip 3. Make a tight budget: Determine exactly what you can afford and allow yourself 10% of your total for contingencies – this might cover price rises, having to change suppliers and other issues that may lead to increased prices.
You should also consider in determining your budget what you can conceivably do yourself or what you can purchase and supply directly to the trades people.
It is highly advisable that you don’t do anything yourself that you are not skilled or practised in.
As an example, a bad paint job might save you money in the short term, but ruin the appearance of the house.
Most of us can create a good garden presentation, but we may need a reticulation expert to get this right.
Tip 4. Research: There are many great tools for people looking for information about property. Websites such as REIWA.com.au and RPdata.com.au can help you get information about house prices.
You should also be able to get a picture of prices in the suburb and the growth in the suburb and street.
Importantly you should be able to get information that will help determine the potential sale price of your property post-renovation. Your real estate agent can help you find a lot of this information.
Tip 5. Determine what you are worth: In any equation that involves your time, it is worth determining how much you should be earning per month from the project – is it $5,000 per month or $10,000 or more. You should use this figure in all your budget calculations.
Tip 6. Finding your property to purchase: Select your area. Start slowly and simply. Value is perceived, so concentrate on finding properties that you can add perceived value to.
A property that is rundown will obviously create more work, but potentially a greater return.
At the same time the state of the house may be hiding other problems, so it is very important to get a building inspection done.
Tip 7. Find your buying price: Determine the price you hope to sell for. Determine all the costs of the renovation. Add 10% to the total for your costs of selling/stamp duty etc. Add 10% of the total for cost overruns. Deduct the profit you hope to make. The price left is what you can afford to pay for the property you are looking to buy.
Tip 8. What sort of renovation should you do?: It is important to understand the demographic of the area – is the majority of the market looking for 4 bedroom, 2 bathroom homes or are 2 or 3 bedroom homes more popular?
Determine who you are trying to sell to. This will help you decide how you renovate and the colours you use – will it be bland/neutral/bright colours etc.
You should do the cosmetic renovations first – the most obvious renovations are usually the best and the ones that will create the best return. For instance, use of Faux Panels can quickly enhance the look and, possibly, the value of interior.
You should look through the house and decide room by room what you are going to do.
Things like painting, fixing and recovering kitchen cupboards, fixing and redoing wet areas are also very noticeable.
It’s a good idea to look for items people expect to find in modern houses – dishwasher, dual flush toilets, spa, reticulated gardens, new kitchens and laundry.
Tip 9. Making the offer: Talk to the agent selling the property, ask them lots of questions and get an idea of what the sellers might take.
Never ever go above your walk away price – there’s no point paying more than you can afford.
If you are in it to make a profit then this should be your focus. Get pre-approval from your financial institution, since this is good for the real estate agent to know when taking offers back to the sellers.
Tip 10. Getting the renovation done: You should get three quotes for all projects – all the time.
Organise and book in the tradespeople before the settlement (time is money).
Set dates for start and finish when booking jobs and offer incentives for early completion.
Meet with the tradespeople before they start, be available and approachable during the process.
Reconfirm with all your tradespeople two days before they are due to turn up. Pay your tradespeople and pay them on time – if they are part of your team you don’t want to create bad blood.
Thank your tradespeople for the work they do for you, and don’t change your mind during the job – this will cost you money and agitate your tradespeople.
Listen to their advice, as they will probably know more about what they are doing than you do.
Tip 11. Getting a Good Real Estate Agent: Be prepared to pay more than market rates for the best, most effective and most helpful real estate agent.
This is not just about their ability to negotiate the best deals and create the best marketing plan to sell your house (though these are very important) – the clincher is when they start calling you with properties they have seen that match what you are looking for.
If they understand your need to renovate for profit they will actively search for properties that fit your requirements.
Obviously if they can sell you the house that you make money from, you are more likely to let them sell the house when you are ready to put your property on the market and realise your investment.
Tip 12. Renovating isn’t just about buying and selling: Renovating can also be a buy, renovate and hold – which may open you to neutrally gearing the property.
Make sure you don’t get emotionally involved in the buying and selling process of your homes. Remember you are doing this to make a profit and the best results will be achieved by people that stick to their budgets.