All Topics / Value Adding / Renovation costs as a percentage of purchase price

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  • Profile photo of shangrila00shangrila00
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    @shangrila00
    Join Date: 2009
    Post Count: 65

    Hi All,

    Just a quick one – when renovating an IP, what would more experienced renovators say is an acceptable cost as a percentage of the property's purchase price? That is, on the basis that renos are done up to scratch, while still trying to minimise costs? 10%?

    Thanks!

    Profile photo of J&TJ&T
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    @jye-and-tahnee
    Join Date: 2011
    Post Count: 37

    Hi Shangrila00,

    We are embarking on our first renovation next year, but have learnt that 10% for a cosmetic renovation (interior & exterior paint,kitchen,bathroom,general tidy up) is a reasonable figure to use. 

    Cheers,

    Jye and Tahnee.

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,018

    I think it all depends on what you want to do and the property itself/

    Last couple of deals i have done have been complete renovation of a block of units which has involved a little more than a bathroom and kitchen upgrade.

    Details of a deal i did earlier in 2012 (with actual numbers) is featured in the Jan / Feb edition of the API magazine.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of J&TJ&T
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    @jye-and-tahnee
    Join Date: 2011
    Post Count: 37

    Good advice Richard,

    I agree – for a more advanced renovation you would be looking at more than a 10% overall cost allocation! It would also depend what profit margin you are happy to get at the other end as well wouldn't it. i.e. if you spend over the point at which you are adding value to the end property you are going to be eating into your bottom line profit.

    I'd be very interested to read your Jan/Feb API article. I'm at work in PNG at the moment so can't get my hands on a copy. You don't have an electronic version you could email me do you?

    Cheers,

    Jye Thomson.

    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
    Join Date: 2009
    Post Count: 2,539

    As the others have pointed out, it depends what you want to do with it. 

    If you have bought something and plan to keep it to rent it out, you might decide you want to just get it to liveable status, or nudge it to the next level of tenant.  Perhaps you might only need to do an extreme clean.  Or maybe change the floor coverings and the taps.  Perhaps a couple of new plants and some mulch to create a garden bed out front. Or you might decide to upgrade the kitchen and/or bathroom as Richard mentioned in his post.  Or you might gut the place and redo everything.  Whatever you do it needs to pay for itself.  Not much point embarking on a $50,000 renovation only to be able to fetch $5 per week more in rent… unless your strategy is to tap into the equity you manufacture.  Even so that'd be risky I reckon.  It'd want to be some serious equity that would enable you to buy a building that paid for itself and your $50k reno, because your tiny little $5 per week rental hike sure would not be paying for the $50k lending for the reno.  The interest on $50k per week would be more up around the $60 mark, and you'd only be collecting $5 of that in hiked rent.  Make sense?  I'd be wanting a bare minimum of 15% annual return for my troubles of embarking on a reno.  So let's say I forked out $20k for a renovation, I would expect the reno to increase the achievable rent by a minimum of $20k x 0.15 = $3k per year.  So that works out to about $57 per week extra in achievable rent.

    If you bought something with the intention of renovating it and onselling it for a profit, you need to start with knowing exactly how much you can sell the renovated product for, and to whom (eg young family, elderly folks, young professionals).  Your reno should be designed with your target market's budget and taste/needs in mind.  Once you know your onsell price, you work backwards.  How much will it cost to renovate the place to the standard required to put it on the market?  What will the fees involved be?  (Real estate agent selling costs, solicitor costs at buy and sell phase, bank loan setup costs and mortgage interest).  You will then know how much you can afford to pay to buy the property (and cough up for the stamp duty) at the original acquisition phase.  If you can't make a profit out of it with some breathing room for surprises or shifts in interest rates, you don't buy it.  Or at least not as a reno and flip project.  You might be able to make it work as a buy, reno, hold and rent it out project, with a revaluation post-reno to access the equity to go again.

    Others will have different formulae they like to work to.  It all comes down to your goals, your comfort level, your available time.  But it must not result in making a loss.  Making a loss is of course what you want to avoid.

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
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    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    Depends on the many factors including the location of the property. I would suggest that you map out what renovations you are considering to do including materials used. Then take this to a few agents and get their take on what works in the area. For example, the market in the area I live in dictates that only timber flooring is suitable however I have properties in Western Sydney which dictates tiles.

    Last thing you want to do is spend money using the wrong material in the house. Also consider ways of opening or closing walls to make the floor plan more attractive. It is surprisingly inexpensive to do.

    TheFinanceShop | Elite Property Finance
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    Residential and Commercial Brokerage

    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    It all comes down to the location and purpose of the renos.

    For instance, you obviously wouldn't place a $2k bunnings flat pack kitchen into a $1m property – for the same reason, you wouldn't spend $50k on a kitchen in a sub $200k unit in West Sydney. 

    Are you planning on holding onto the property or selling it?

    Personally, I've never worked to percentages – I've just started off with a list of work I wanted done and then based my costings off that. The last major renovation was on a $450k IP in Canberra's south. We spent about $15k and it included new flooring, paint, refaced kitchen, rendering and landscaping. 

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of J&TJ&T
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    @jye-and-tahnee
    Join Date: 2011
    Post Count: 37

    Logically and articulately explained JacM. 

    As you said everyone will have different formulae they work with if they are doing buy-reno-sell (for profit) projects. Different people may even be happy to settle for different percentages of profit returned for each project. And yes…if you can't make a profit after ALL of your costs to acquire, hold, renovate, market, and sell then it isn't worth doing…for a pure profit project anyway. Move onto the next deal and work the numbers there.

    Cheers,

    Jye and Tahnee

    Profile photo of J&TJ&T
    Participant
    @jye-and-tahnee
    Join Date: 2011
    Post Count: 37

    Logically and articulately explained JacM. 

    As you said everyone will have different formulae they work with if they are doing buy-reno-sell (for profit) projects. Different people may even be happy to settle for different percentages of profit returned for each project. And yes…if you can't make a profit after ALL of your costs to acquire, hold, renovate, market, and sell then it isn't worth doing…for a pure profit project anyway. Move onto the next deal and work the numbers there.

    Cheers,

    Jye and Tahnee

    Profile photo of shangrila00shangrila00
    Member
    @shangrila00
    Join Date: 2009
    Post Count: 65

    Thanks for everyone's comments so far!

    My plan is to do a cosmetic renovation on the property and rent it out. It's a bit of a dump at the moment, so the renovations can't be too flash. Must be in a decent, liveable condition, with a reno on a budget.

    Painters, for example, are quoting me an arm and a leg, however! The amounts I'm being quoted are worth about 30 weeks of rent, so even if I personally did the painting, I can take my sweet time doing it and still come out on top (obviously I won't take 30 weeks to complete it). 

    I've run the to-do things past my property manager and she agrees with what I have in mind, advising me any more will not be necessary. Hence, I'm trying to keep costs at a minimum.

    This is my first IP reno, so learning curves ahead…

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