Renovating for profit
If I had a dollar for every time someone said to me, “You renovate houses for a living?! I would love to do that – that’s my dream job!” I would have so much money I wouldn’t need to renovate houses anymore.
What is it about the idea of renovating houses that appeals to so many people? Is it all it’s cracked up to be?
Like many things in life, there are many elements to being a full-time renovator or flipper.
Flipping (buying a house, renovating it in a fairly short time period and selling it) is high risk and not for the faint hearted. With hundreds of thousands of dollars at stake, you need to have done your research and know what you are doing.
I have spent years, and tens of thousands of dollars developing my property and renovation knowledge, which now allows me to make quick decisions as to whether a renovation project stacks up. That means to date that we have made a profit on all of the projects we have undertaken.
The road to renovation heaven is littered with many people who have fancied themselves as a renovator, only to undertake a project and lose money. There are generally a few key reasons why a renovation projects loses money – paying too much for the property, not setting a firm renovation budget (and/or exceeding the budget), not allowing for all the costs associated with flipping in addition to the renovation (stamp duty, holding costs and selling costs), and over-estimating the sale price once it is renovated.
When working out whether a property potentially stacks up as a flip project, the first step is to actually work backwards. That is, work out the (realistic) re-sale price of the home once you have completed your renovation. Local real estate agents should be able to help you determine this figure, in addition to researching property prices on realestate.com.au and RP Data.
You then need to calculate selling costs (agent’s commission, marketing and conveyancing) which will total about 2.5% of your sale price.
It’s essential to fully scope and cost your renovation so you can set a firm renovation budget, with contingency funds also allocated (generally 10% of the renovation budget).
Holding costs are often overlooked by newbie renovators – this includes any interest or mortgage costs you will have to pay while renovating, insurance and utilities – and can have a significant impact on your final profit figure.
Stamp duty, other government charges and conveyancing costs when you buy the property can total up to 5% of the purchase value and need to be factored into the deal.
Then the good bit – working out how much profit you can realistically expect or want to achieve for your time and effort. There are no hard and fast rules on this, different people have different expectations.
All of the above subtracted from your expected re-sale price gives you an idea of how much you can afford to pay for the home in its original state. Straying too far away from this figure could see you making little profit or, even worse, a loss on your renovation project.