Not every un-renovated property has the potential to make a profit.
You must be sure of your numbers before you even consider writing up an offer on a property but where do you start? The keyword here is percentages.
To avoid being overwhelmed, outlined below are some key percentage numbers to get you started.
The number one reason you are renovating an investment property is for profit. Whether you are renovating for capital gain or for a higher rental return, you are still aiming to increase your property’s value. So you need to be clear about how much profit you expect to make.
10% is the magic percentage number here.
Add up all costs associated with purchasing and renovating the property and multiply the total by ten percent. This figure is a reasonable number on which to base your profit expectations.
To further understand this scenario, have a look at the example below. Although the costs are based on buying, renovating and selling a property, the percentages still work for a property you intend to rent out.
|Stamp duty||$ 11,000|
|Settlement fees||$ 1,500|
|Holding costs||$ 12,000|
|Renovation costs||$ 21,000|
Expected profit will be $39,550 – 10% of our total costs of $395,500.
An end sale price of at least $435,050 will need to be achieved in order for this profit to be realised.
Some experts will suggest that you don’t even consider a renovation that returns less than 20% profit.
Whilst this may be good advice, deals with this profit margin are difficult to find. If you renovate and sell within a four week period, your return – based on the above example – would be $10,000 per week. If you’re happy with that – go for it!
Remember, these percentage figures are just a rule of thumb. You are the one in control of your investment strategy.
Total renovation costs
Once you are happy with your anticipated profit margin, you will need to concentrate on the renovation details.
We all know that sticking to a tight budget is the key to a profitable renovation but how do you determine how much that budget should be?
6% is the magic percentage number here.
By multiplying the purchase price of your property by 6% you will discover a reasonable baseline from which to plan your renovation budget.
In our example, the purchase price of the property was $350,000. When we multiply this by 6% we arrive at a figure of $21,000.
While it might be tempting to go shopping for stone benches or bamboo flooring, you need to stay focussed on the percentages.
Breakdown of renovation percentages
So many areas of the house will require attention – how will you know where to best direct your funds?
Here is a simple percentage guide with associated figures based on our example.
These numbers will be dependent on your research into your target demographic and other suburb due diligence and should be tweaked accordingly.
The “interior” figure will include a diverse range of items such as flooring, window dressings, painting, electrical and plumbing. Knowing your target market will help to prioritise spending.
“Exterior” can include cement rendering, landscaping, driveways, patios, painting and rubbish removal.
There will always be unforeseen costs associated with a renovation. It is therefore extremely important to include a “contingency” figure in your renovation budget.
When renovating for a profit you will never feel like you have enough money to do everything you want. But that is part of the challenge!
Keep the following key points in mind when planning your renovation and you will enjoy the challenge while increasing your property’s value.
• Spend money on items that have the most visual impact and ones that appeal to your target market
• Save money by partially renovating areas such as kitchens and bathrooms. This can be done by painting existing cupboard doors but replacing benches and splash backs
• Remember that for each renovation dollar spent, there needs to be an added end value of at least two or three dollars
Have fun and make profit!
Please let us know if percentages have helped you when planning your renovation by commenting below.