Renovating a property is a popular past time, especially for owner occupiers.
It is also popular for investors as making a property more liveable and with extra facilities can add value and command a higher rent.
In this article we will look at renovating for capital gain, but under the assumptions that we have a house that will be rented to tenants for a few years and therefore we will not sell it off after the renovations.
Identify Upgrades that will most satisfy the market
I always try to encourage people to identify their target market. Much like a business, you want to know who your customer is and what they are looking for. That way you can cater to their needs with confidence.
Do they need more parking?
Do they want better kitchen facilities?
Do they need better climate control?
Apart from giving the market what it wants, you may also just need to replace some things that are worn out or way out of style.
How are the carpets?
Do we need to re-paint?
Should we keep that 70’s trippy wallpaper?
Work out your Budget
After you’ve decided what work will be done, it’s time to start costing. Use estimates based on prices you can research online for the physical items (such as carpet). You will then need to get quotes from tradesmen for work that you won’t be doing yourself.
When getting quotes, also ask when they will be available to do the work as having a cheaper quote means nothing if you cannot get the work done when you need it.
Once you’ve got all the numbers together, add them up and then add another 10% to the total. This is to allow for “unforseen” works. If everything works out perfectly, then you should come in under budget, but these projects are usually under-estimated for those who don’t have a lot of experience.
Organise the Works
The time it takes to get your improvements done is crucial to the outcome. Especially if there is a mortgage on the property, the longer the project drags out, the more interest you pay without having rental income coming in to help out.
Interest repayments should be included in your budget as they are a holding cost (assuming that you are not receiving a rental income).
Track your costs
Keep all your invoices and track all your expenses with a spreadsheet, or a dedicated program built for this purpose.
It’s almost certain that your actual costs will differ from your budgeted costs, as with any project, which is fine. You just want to aim to get as close as possible to the budgeted amount, without cutting corners.
Get a valuation
Now comes crunch time, was all the effort and money worth it? You can get your property manager to give you a rental valuation, probably for no charge.
Does the property command more in rent?
If the property will now fetch more rent per month, it is most likely it’s value has increased as well. You can hire a valuer to provide you with a formal valuation of the property if you like, but this can cost a few hundred dollars.
How much has the property gone up?
If the increase in value is more than what you spent, well done, you’ve just made a profit.
If the increase is about the same as what you put into the renovations, well that’s not bad, at least you have generated more income and not lost any money.
If the increase in value is less than what you spent on renovations, then lesson learned. Don’t be deterred, just work out where you over-capitalised and don’t make the same mistake next time. It could also be that the property market is flat or declining in which case you have no control over the outcome.
Ultimately, your first renovation should be a trial and be careful to manage your costs. If you break even on your first go, you’ve done well in my opinion. If you decide that you enjoy the process, then next time you may even get a profit.
Renovating for capital gain is certainly a technique that can help you accelerate your property portfolio, but it requires a lot more time, money and effort to get the results you want.