One of the most profitable strategies investors can use to get ahead with their wealth creation goals is to embark on a smart property renovation.
But if you’ve read any reno horror stories, seen the spectacular failures on The Block or had a less-than-positive renovation experience yourself, you’ll know what I mean when I say that renovating real estate can also be a costly path towards financial ruin.
The biggest problems can arise when investors underestimate the amount of work involved, and/or overestimate the potential profit in the deal.
The successful property renovations, on the other hand, almost always follow the same loose formula. In these cases, the following factors are generally present:
Secret #1: The property is purchased under market value
It goes without saying that if you want to make a profit, you need to purchase the property for the most competitive price possible. Let me be clear when I say that simply purchasing a cheap property does not constitute bargain buying, or signify that the deal was secured ‘under market value’.
To truly purchase a property for less than market value, you need to know the market inside out. I’ve heard it said that you need to personally inspect at least 50 properties in one area to get a feel for the local market and I think that’s about right. Your goal is to pay less for a property than it could fetch on the open market and in this respect, there is no substitute for a good ol’ fashioned investment of time.
Secret #2: The renovator has a clear strategy
If your goal is to find a property where you can manufacture capital growth, you need to have a plan for exactly how you’re going to achieve that goal – whether it’s through a cosmetic refurbishment, an extensive renovation or a full redevelopment.
Investing in a property with a vague goal to “renovate for profit” isn’t enough. It’s crucial that you create a clear, detailed strategy with a realistic estimate of costs and project timelines, to ensure you don’t bite off more than you can chew.
Secret #3: The property has genuine potential
Just because a property is in established condition and requires some work to restore it to its former glory, it doesn’t mean it is automatically an ideal candidate for a property renovation.
It’s vital that you do extensive due diligence first, as you would with any standard residential property investment, to be sure you have located a property with potential – ie. within a growth market, with a strong employment base, where unemployment rates are low and where vacancy rates are tight.
Otherwise, do you know what you could be left with? A beautifully renovated home that no-one is particularly motivated to rent or buy, but where you’ve invested boundless time, energy and money for next to no return.
Secret #4: Every renovation dollar adds value
The very simple ratio that professional investors use when renovating is 1:2. In other words, for every $1 spent on a renovation, a minimum of $2 must be added to the property’s value.
Note that this is the absolute bottom line – many experienced renovators work with a ratio of 1:10! The moral of the story is the same: don’t invest in a single renovation unless you’re certain it will add value.
Secret #5: The renovations give the property some ‘wow factor’
I know that many property experts advise landlords to keep things neutral: neutral walls, neutral carpets, neutral décor, neutral design. This is a purposeful move to help the property appeal to the widest possible audience, but if you adopt this strategy wholeheartedly, you run the risk of owning a neutral property that no one ever gets excited about.
When renovating, make sure you do something that gives the property a ‘wow factor’. It could be eye-catching wallpaper on the living room feature walls, a modern, attractive light fitting at the front entrance, or converting an unused hall space into a study nook. Where-ever you can find an opportunity to surprise and delight, go for it, as it will help to give your property an edge over the competition and help would-be tenants or buyers fall in love with your property.
I’ve had extensive experience in renovating for profit and I can attest to the fact that it can be an incredibly effective way of generating profits and increasing your rental income.
That said, as with all aspects of creating wealth through property, it’s impossible to do it all on your own. If you’re renovating for the first time or you’ve taken on a big project where you’re entering unchartered waters, be sure to check in with your property advisors or mentors, so you can be sure you’re on the right track towards renovation success – rather than ruin.
Til next time, happy investing!