Once you decide to sell a property any money that you put into the property should be deemed as an investment. This applies even if you have bought an un-renovated property that you intend to sell.
The purpose of investing is to make profit. Therefore, each dollar that is invested into the property should be linked to profit. Many people make the unfortunate error of putting a brand new kitchen with high quality appointments into the home just before they go to market.
The brand new kitchen may improve the sales price, but if a $50,000 kitchen adds $60,000 in value, is the effort, cost and stress worth it? Often the $50,000 kitchen only adds $30,000 or $40,000 to the end price, making the investment of the kitchen a loss.
Television shows are full of people making renovating look fun.
To prove the point that renovations are not all high times and high profits, take the results from The Block over the past 5 years. Whenever the properties have a commercial reserve price set, the auction often fails to meet the reserve. Only when they have an partially low reserve does The Block look fun.
Let’s call a commercial reserve, purchase price & costs + renovation costs = reserve price.
Who will ever forget the devastated contestants in the 2014 series of The Block who gave up 3 months of their lives to win … nothing. This happens every day in the real world. In the real world, renovators are not given free labour and subsidised product from sponsors either. Keep in mind that good television and renovation profits are separate events.
Works that can be done below retails costs and retail priced works that add value beyond cost.
Works below retail costs
Many renovations add around $1 for every dollar that is invested into the property. If you are undergoing a structural renovation, to create true and meaningful profit from the works, you need to be able to get the works completed at a lower price than what a builder would charge a client. The amount you save on the works will flow through as profit on the end product.
This is why so many developers/builders do so well out of un-renovated/unlivable properties. There is a huge upside in the dwelling and they can get the works done at a price that produces profit. The disrepair of the property frightens most if not all homebuyers that plan to pay retail costs on the works.
Retail priced works that add value beyond costs
Paying full market price for works and profiting on those works is difficult but possible. If you employ a painter to paint the house for $15,000, it is very common to see the works add $30,000 or $40,000 in value. As a general rule of thumb, painting, carpeting and landscaping are works that will create profit beyond the costs of works.
Market growth often masks the true impact of renovation costs. If your plan to do profitable renovations works out on paper prior to selling, any market growth in that time is a bonus. Relying on market growth to fill the hole left by the renovations costs is not a fun space to be in.
Unless you are a builder, most profitable renovations tend to be of a cosmetic nature. Profitable renovations that involve DA’s and structural works are best left to the experts.