Learn to estimate renovation costs by finding the median price in your area, inspecting comparable properties, then adding acquisition, holding, and renovation costs to calculate your target buy price. A worked example shows how a $470,000 purchase with $80,000 in costs reaches a $550,000 median; aim for 15% return on purchase price as a first-time renovator.
Questions this video answers
$550,000
$40,000
$15,000 for six months
$25,000
$80,000
Chapters
Now, let's look at some of the other ways of doing a quick cost analysis for what your property needs versus what your potential profit may be. That brings Me to Method 2. Now you need to include the following. Work out what the median price is in the area. Visit those properties and note the improvements that they have had made to them. Calculate the cost of the improvements on the property you found to get to that standard. Now you need to work out your buying and your holding costs. Now remember, buying costs, we're talking about stamp duty and legal fees. Holding costs is the interest rate and the amount of time it's going to take you to do the renovation. Then do a rental comparison between the two. For instance, so if you spend $30,000 and you get a $10 a week increase, is it worth it? Well, it might be if you're adding $100,000 in value. You need to work out what your profit point is. What is your profit? Here's what it should look like. So, a median price of $550,000. The renovation costs. Let's work through those costs. $40,000. Holding costs for six months. So you need to determine your own time frame. $15,000. Acquisition costs, $25,000. Now, if the old rent, based on a rental yield of 4%, was $280 a week, based on the new value at 4% rental yield, we're looking at a new rent of $390 a week. Interesting. So let's work out what the buying cost needs to be. So we've looked through the costs. We've got 40,000 for the renovation cost, 15 for the holding costs and acquisition costs of $25,000. That's $80,000. So $550,000 being the median price minus the $80,000 gives us an idea of how much we should be buying our property for. Now, if the buying cost was $420,000 and 550 minus 80 gets us to 470, that means we've created $50,000 worth of new equity. So if the buying cost is $450,000, so maybe your negotiations didn't go so well, then the new equity is actually $20,000. Now, what if you buy at $470,000? Well, there's no new equity. So remember, we haven't included any profit in here. So anything that you buy below $470,000 is where your profit centre come from. So think about that for a moment. The buying cost of $470,000. If we add on our acquisition cost of 25,000 our holding cost of 15,000 and our renovation cost of $40,000. That gets us up to the median price of 550. What have we missed? Our profit. So we have no profit if we're buying at $470,000. So we need to buy below that to actually make some money. We want to create that new equity. We want to get profit for the cost of renovation that we've put in. So how do we estimate the cost of these renovations? Now there's a ton of costs associated with both the cosmetic and a structural renovation. These costs include the cost of architects, tradespeople and suppliers. It may also include a time investment, getting council approvals, dealing with neighbours, saying no to what you envisage for your property. First and foremost you need to work out what the purchase price should be. So you know if you should even consider a property, then based on the asking price, you can work out the profit you set. The profit that suits your needs to get you to your goals in your time frame. And you would at the very least want to get the $1 you spend back. Thus, if you spend $20,000, you want to add $20,000 in value, but you want to do so much better than that. Now if you're re stumping re roofing, fixing cracks in the wall, then I doubt you're going to get any value back. For the funds that you've spent on that you need to be realistic. Obviously, if you spend $20,000 and create a third party further $20,000 in value, then the property will be worth $40,000 more. That is you have made $2 for the dollar you spent, that is $40,000 divided by $20,000. That gives you an idea of a rule of thumb you might want to consider for your profit that you want to generate. Generally, the rule of thumb on what you should spend on a cosmetic renovation ranges from 8 to 10% of the purchase price. Some believe that they can do a rejuvenation renovation strategy, that is a new kitchen and bathroom for 8% of the purchase price. Others allow this to creep a little higher. And when you start off it gives you a bit of a buffer. I would normally aim for the 10% mark when doing big picture guesstimates. And as a first time renovator, I would suggest that you aim for a 15% on the purchase price as a return, that is $2.50 for every dollar you spent. There is plenty of number crunching and milestone planning for even the smallest renovation job. So here are my top tips on plan ahead. If you know exactly what you need to do and how you need to go about it, it will reduce your chances of the project going off the rails and taking longer and costing more than you intended. You can economise on materials, shop around and you may be able to find discounts on what you need. Where possible, aim for materials that a supplier currently has in stock, preferably in surplus, as there is a far smaller chance of getting a discount where materials need to be ordered in, and go for quality where it shows it's worth investing in decent quality. Finishing products such as fixtures and fittings, as these will be on display and take the brunt of the property's wear and tear. Save money in the long run by reducing the need for future touch ups. Get at least three quotes when looking for professional help, get more quotes than you think you'll need in order to give yourself a large enough sample to make an informed selection.
