Renovating your home or investment property is a great way to increase its value, and your equity in it.
But not all renovations are equal — some people end up making very costly mistakes that cost them thousands of dollars. So we need to look at what you should, and shouldn’t do, in your renovation.
The first thing you need to know about renovating is that there are only two main types of renovations: cosmetic and structural. We’ll focus primarily on addressing the costly mistakes in cosmetic renovations because that is usually where people start their renovating experience.
To complete structural renovations is another step up from there — and where there is also more risk, knowledge, experience, time and money involved. We recommend you gain experience in the cosmetic renovation arena first before you consider undertaking a structural renovation.
Unfortunately, making money from property is not as easy as TV shows make it look. The good news is that with the right training, mentors and a little creativity the rewards can help you to achieve your financial goals faster than you thought possible.
While the profits of a successful renovation project should not be underestimated, it is important to be aware of the potential risks and how to minimise them.
Where to start
Before commencing any new venture in renovating property, it would be prudent to first invest in improving your knowledge by attending a professional training event. You need to know what to look for and how to overcome the problems that arise and leverage off other people’s experience to help eliminate the risk of costly mistakes.
So let’s get to it. In this edition we’ll cover the first 12 mistakes.
Costly mistake #1 – Not doing proper due diligence
Rushing into a project and not taking enough time to conduct proper due diligence is one of the biggest mistakes people make. They get caught up in the emotion and excitement of it all and that’s when things can unravel. They don’t spend nearly enough time researching the suburb and surrounding areas.
Not doing your homework on the comparable market pricing of houses in your specified area will bring you undone very quickly. It is important to realise that most suburbs have a median sale price and an upper sale tolerance. Even different streets in your chosen suburb have different price thresholds — consider the housing styles, demographics of your suburb, current market trends and recent sale prices achieved of other homes in the area.
Costly mistake #3 – Not researching the specific property
Many people who renovate to profit don’t fully research the specific property they’re buying. Using a checklist is a good way to force yourself to research everything systematically before you purchase a property. What matters most is what sells well and what is demanded in the local market. Once you understand market requirements, you can select properties that can give you a profit.
Costly mistake #4 – Not undertaking a profitability analysis
Undertaking a profitability analysis for each potential renovation project is a must. Being able to precisely calculate the numbers on a property renovation deal and instantly uncover the profit (if selling) and cash flow (if holding) is the difference between those who are successful and those who are not.
Costly mistake #5 – Failing to plan your renovation
Not having a clear plan or upfront strategy of what your renovation will entail will most likely lead to cost overruns and the outcome probably won’t meet your original intention. This can be solved by ensuring you have an appropriate plan, which should include a clearly written scope of all the planned works.
Costly mistake #6 – Changing your mind mid-project
Changing your mind mid-renovation has the potential for huge cost blowouts. When considering changes mid-project, always base it on what return you expect to gain on the additional investment. When you change your mind you need to identify what the cost will be and weigh it up with how much additional benefit (resale price) it may provide.##Costly mistake #7 – Wrong renovation, ignoring resale value While you may dream of a unique renovation that speaks to your personal taste, renovators who care about resale value, and therefore profits, should focus on projects that will increase the property’s value/worth. A big mistake is to over-improve to your own tastes, like installing granite or marble bench tops, very high-end appliances, solid internal doors and expensive fittings and finishes. If you spend unnecessarily on unimportant, high cost and unseen items, you won’t see a return on your investment, particularly if it makes you push your property into the highest priced home in the neighbourhood.
Costly mistake #8 – Overcapitalising
If your renovation project is being done with resale in mind, be very clear as to what the property will be valued at when it is completed. You may find the renovation costs will not be recouped in the short term.
If you plan to live in the home for some time the costs may be justified in lifestyle and comfortable living.
Costly mistake #9 – Underestimating costs
Under-estimating all the costs involved in renovating and not doing a detailed financial feasibility on the project beforehand is one of the biggest mistakes people make when restoring a property for profit.
Renovators (particularly inexperienced people) typically under-estimate the costs involved in repairing, renewing, replacing and building, such as rubbish removal costs, contingencies for variations, landscaping, kitchens and bathrooms.
Costly mistake #10 – Blowing the budget
Renovating always seems to cost more than you initially expect, especially if you’re not familiar with all the things that could impact the project. Older homes and larger jobs are more likely to have hidden expenses such as plumbing, electrical or other work that is hidden behind walls and ceilings. There could be mould, water rot, shower leaks, corroded pipes, blocked pipes, termite damage, fire hazards or asbestos.
Costly mistake #11 – Using questionable tradespeople
It’s important that qualified and suitably experienced contractors are appointed. Any contractor you hire should be licensed and have a solid professional standing. Ask the contractor for references. Use word-of-mouth for reliable recommendations.
Costly mistake #12 - Confusing TV fiction with reality
If you’ve been watching TV reno shows, the reality is that they’re not even close to real life renovating. That’s why it’s called entertainment!
In the Autumn 2017 issue of Sydney Hills & Hawkesbury Living we’ll look at more costly mistakes you could make while renovating to make a profit. ❐
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