Un­der­stand­ing the ren­o­va­tion prop­erty for­mula by Pa­trick Bright

When ren­o­vat­ing there are lit­er­ally hun­dreds of im­prove­ments, big and small, that peo­ple can make to in­crease the value of their prop­erty. The trick is to add more value than the ac­tual cost of the im­prove­ments writes Pa­trick Bright.

Business First - - CONTENTS - Pa­trick Bright is the Di­rec­tor of EPS Prop­erty Search. As a buyer’s agent he has pur­chased over 500 mil­lion dol­lars’ worth of real es­tate for clients and is the best-sell­ing au­thor of four Real Es­tate books in his “In­sider’s Guide” se­ries’.

The big­gest mis­take I see ren­o­va­tors make is fail­ing to con­sider the needs and wants of their prospec­tive ten­ants or buy­ers. When ren­o­vat­ing for profit, it’s im­por­tant to cre­ate a prop­erty that ten­ants want to rent and buy­ers want to buy. You have to be­gin with the end in mind.

Ren­o­vat­ing is more than mar­ble fin­ishes, soft light­ing and de­signer fur­nish­ings; it’s a peo­ple busi­ness, not a prop­erty busi­ness. You can do a first-class ren­o­va­tion but if the prop­erty backs onto a rail line you’ll have trou­ble rent­ing and sell­ing it. That’s one of the rea­sons why prop­erty se­lec­tion is so crit­i­cal.

The Ren­o­va­tion Profit For­mula

The the­ory be­hind ren­o­vat­ing for profit is what I call ‘the profit for­mula’. The for­mula is like the fil­ter through which you view a prop­erty, so it’s im­por­tant you un­der­stand it thor­oughly BE­FORE you start look­ing for prop­er­ties to buy. It helps you to de­ter­mine the po­ten­tial prof­its in a prop­erty and thus set a max­i­mum buy price.

When you’re as­sess­ing a prop­erty ren­o­va­tion deal, al­ways try to cal­cu­late what the value of the prop­erty will be once you’ve ren­o­vated it. Then sub­tract your to­tal ren­o­va­tion costs which are all the costs of tak­ing the prop­erty to that fin­ished state from where it is to­day. Now work out your pur­chas­ing costs and sub­tract them. This is your break square fig­ure. If you pur­chased the prop­erty at this price you make no money. But ev­ery dol­lar you pur­chase be­low this fig­ure is po­ten­tial profit in your pocket.

In a nut­shell the ren­o­va­tion profit for­mula is: End value, less ren­o­va­tion costs, less pur­chas­ing costs is your breakeven. Ev­ery dol­lar be­low that breakeven point is po­ten­tial profit. It’s im­por­tant to note that the to­tal ren­o­va­tion costs in­clude the hold­ing costs and the buy­ing and sell­ing costs if you de­cide to sell the prop­erty. Here’s my 7-step plan for ren­o­vat­ing prop­erty for profit:

STEP 1: UN­DER­STAND THE REN­O­VA­TION PROFIT FOR­MULA:

Whilst the ren­o­va­tion profit for­mula is a sim­ple equa­tion, de­ter­min­ing the fig­ures that you put into this equa­tion is crit­i­cal and takes skill and ex­pe­ri­ence. You must be ac­cu­rate when as­sess­ing the value of a prop­erty post ren­o­va­tion and itemise all ren­o­va­tion costs.

STEP 2: WORK OUT HOW MUCH YOU CAN AF­FORD

You need to have enough saved to cover the three ma­jor costs of ren­o­vat­ing: the cost of buy­ing the prop­erty, the cost of ren­o­vat­ing the prop­erty and the sell­ing costs or the on­go­ing costs to hold the prop­erty.

STEP 3: TAR­GET THE RIGHT PROP­ERTY TYPE

Match your risk pro­file and abil­ity to the right type of prop­erty. Be­fore buy­ing a prop­erty to ren­o­vate it is im­por­tant to con­sider your risk pro­file care­fully, in­clud­ing how com­fort­able you are with the pos­si­bil­ity of los­ing money, or that the re­turn may not be as high as you had hoped for.

STEP 4: MAR­KET RE­SEARCH AND PREPA­RA­TION

This in­volves iden­ti­fy­ing sub­urbs and the types of prop­er­ties within those sub­urbs with the great­est profit po­ten­tial, re­search­ing prop­erty val­ues, brush­ing up on design and dec­o­rat­ing, and se­lect­ing a team of qual­ity trades­peo­ple.

STEP 5: SELECT THE RIGHT PROP­ERTY TO BUY

Look for a prop­erty with profit po­ten­tial. Your first con­sid­er­a­tion here should be the con­di­tion of the prop­erty. As I ex­plain in great de­tail in my Ren­o­vat­ing for Profit book you’re bet­ter off search­ing for some­thing run­down, but not to­tally derelict.

STEP 6: PAY THE RIGHT PRICE

Work out the max­i­mum you can af­ford to pay and still make a healthy profit. One of the fun­da­men­tals of ren­o­vat­ing for profit is that you buy well. If you’re not skilled in ne­go­ti­a­tion it would be a good in­vest­ment to hire some help from a buyer’s agent.

STEP 7: GET THE WORK DONE ON TIME AND BUD­GET

Avoid profit-shrink­ing cost over­runs and de­lays. Make sure you use a spread­sheet to sched­ule the works. You need to en­sure all the trades­peo­ple do their work in the right se­quence. Al­ways add a buf­fer of a day or so around each trades­per­son. This gives you wig­gle room if there are de­lays.

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