How to renovate for profit (and do nothing yourself)
‘You make your money when you buy’ is a common saying among property investors. I prefer to think ‘if you have twice as much property, you make twice as much money’. My personal strategy is to own lots of property in high capital growth areas as in the long term it’s almost guaranteed to make money. However, if I can also make a profit on day one, then that really is the icing on the cake.
When I buy property for myself or my clients, I choose those that most people wouldn’t touch. I look for apartments that require a new kitchen and bathroom, a good paint job, carpets stripped and floors polished, new window dressings, and new fixtures and fittings. I try to find the ones that are cosmetically tired, and avoid those that need more structural work, as that’s often where problems occur and budgets blow out.
Buyers become emotional over pristine properties, because they can move in straight away. But there’s more demand for these properties, which drives the price up. Conversely, many buyers are put off properties that haven’t been redecorated for 20-30 years, because of the huge time and cost to get them ready to move in. Competition for those properties are low, driving down the price and increasing the profit potential for buyers who are happy to manage a renovation.
Sounds simple, doesn’t it? Renovating a property, however, isn’t always as straightforward as most people think. For one, very few property owners are experts in renovating. How do you know if the tiler you’ve chosen has quoted the right price? Will your bathroom and kitchen really take two weeks as promised – or will it drag out to two months? And should you always go with the cheapest quote?
Above all, how do you know if the $50,000 you’re spending on the kitchen and bathroom will actually add another $100,000 to the value of the property?
Just as with property purchases, renovations require careful planning and execution. Below are important considerations for any property investor looking to maximise their property’s equity by renovating.
Are renovations profitable?
You many be surprised to learn that many people don’t make money when they carry out a renovation because:
- they overcapitalise by spending too much money on it.
- they don’t have the time to concentrate on it, as they’re too busy with their careers and family lives.
- they don’t have the expertise – they haven’t done it before and they don’t know what to look out for.
- they don’t delegate – they won’t spend money to make money, and may be taken advantage of by tradesmen.
If you’ve done your research, if your investment property is purchased well, if the renovations are done correctly and with the right advice, you can make tens of thousands of dollars in equity in the first year alone. It can be as simple as a paint and re-carpet, or it can be as big as a complete gut and refurbishment. Either way, you need to be aware of which path to go down.
How much to spend?
My best tip for buyers is to always to hire an independent property valuer when purchasing property, as they will ensure that you never overpay for it. This advice should also be taken when you are renovating properties. So many people get emotional when buying and renovating properties that they often overcapitalise, believing that the more they spend on the project, the higher the property value will be. If only this were so!
From experience, the way to ensure your renovation makes money is to bring in a valuer at the project-planning phase. You might be planning to renovate your kitchen for $30,000, thinking it will add $80,000 to the property’s value. But a good valuer will know that homes in your street won’t sell above a certain value – even with a new kitchen – and you may be lucky to just get your money back. Instead, the valuer may suggest you spend just $10,000 on new cupboard doors, benchtops and flooring, which may add $20,000-30,000 to the equity – and you’ve then doubled or tripled your investment. Only the valuer will have this kind of expert and impartial knowledge, to help you make an emotional-free decision.
Doing it yourself
You may still decide you will be the one to oversee the renovation. If you haven’t renovated before there’s a good chance that you might under-budget the true costs. My tip is to double your expected cost and then work out if you’re still going to make a profit.
Often simple jobs such as re-wallpapering turn bad when you take the wall paper off and find that that’s the only thing holding the wall up! Imagine, then, removing a complete kitchen or bathroom and seeing what problems might arise underneath. And once you’ve had them removed you can’t put them back – you need to carry on.
Finding a good team of tradespeople and other professionals can be the most challenging part of the job. You can find good tradespeople and other professionals through recommendations from people you know and trust, especially if they are property investors who have done a number of projects.
Once you’ve found your team and the more you use them, the better they’ll work together, as you’ll build trust and learn to iron out an little issues. On the other hand, if you’re doing a one-off project as an individual, finding a good team will be difficult.
When negotiating with tradespeople, if you want a fully inclusive quote that doesn’t rise, a tradesperson will need to put in a large ‘contingency’ cost for all those items that are unforseen. That will be expensive. If you want a cheaper quote, a tradesperson might give you a cost plus quote, meaning he will charge you whatever it costs him in materials plus a set agreed profit percentage on top. This should be cheaper, as you’re only being charged for what’s been used, but if it turns out to be a bigger job than expected the costs may keep rising. Either way, you will need to trust the tradesperson.
Timelines and budgets
A pre-planned kitchen and bathroom renovation should only take four to six weeks. Many property investors who manage the projects themselves find this impossible because they fall into one of the most common traps: choosing tradespeople based on price alone. I don’t often use the cheapest tradesperson – I choose those that can do the best jobs in the shortest amount of time. The cheapest will do it in their own time, but the faster the tradesperson, the quicker you will place tenants in the property.
I find a project manager doesn’t cost me anything. If you did the renovation yourself, you would save their $10,000 fee, but what you thought would be a $40,000 renovation would very likely turn out to be a $60,000-80,000 job – and it would likely be over two months rather than four weeks. That’s money you’ve lost in rent, too.
A renovation should be well worth the effort and expense. Ideally, if you spend $50,000 on a $500,000 property, that property should be revalued at a minimum of $600,000. Again, a valuer should be able to advise you on this from the very beginning.
What happens when it works well
I’m currently overseeing renovations on 10 individual properties with a total project cost of around $1 million. When completed, these properties are estimated to increase in value by more than $2 million, doubling their value within weeks.
It took me my first few projects to build relationships, negotiate fair prices and balance our communication styles, but now a system has been built. I now receive a daily call from my project manager with an overview of what’s going on, any issues or decisions to be made and when they are due to be completed. I have so much confidence in my team that I only need to turn up on site when the job is completed. I also ask the valuer who valued the property on purchase to come in and re-value it post renovation, so the property owners can see the value we’ve created.
My clients don’t receive any calls from the tradespeople as it is all managed on their behalf. Instead, they prefer to receive a financial report before and after, which tells them how much money they’ve made. After all, it’s a financial decision not an emotional one. That’s just one of the benefits a good project manager brings to a renovation.