Seven tips for highly profitable strategic property renovating and flipping
Published 5:23 am 10 Oct 2019
The right renovations can add tens or even hundreds of thousands of dollars profit to a property flip. But what are the rules for success? DG Institute Founder and CEO Dominique Grubisa shares seven tips to make your renovations pay dividends.
How to buy and renovate houses for profit?
- Understand the market
- Don’t overcapitalise
- Do spend money where it matters
- Have a realistic estimate of what things will cost
- Consider a low-cost approach
- Use reliable tradespeople
- Factor in your own time
After a long, painful slump, the housing market is again showing signs of life. In September, new figures showed the national median dwelling price rose 0.9 percent – the biggest monthly jump in more than two years. Both clearance rates and prices are heading north in a range of markets, including both Sydney and Melbourne.
It’s exciting news for property investors — especially those who seek quick financial returns by flipping houses. With things warming up, there’s potential to buy low, to add value through smart renovations, and to sell for a healthy profit. The trouble that many novice renovators face, though, is knowing where and how to renovate. How much should they spend, and on what areas? What are the traps to avoid? And how can they maximise the return on every dollar spent?
Follow these seven tips for renovating prior to a flip and you’ll stand your best chance of making a healthy profit.
1. Understand the market
Before you contact a tradesperson or buy a single tin of paint, make sure whether renovations will add value. Renovations generally only make sense if there’s a significant disparity between the cost of renovated and unrenovated properties in your target area. You might see that unrenovated three-bedroom homes in the area sell for $1 million while renovated ones sells for $1.2 million. If the required renovation will cost you $200,000, undertaking it would just be a waste of your time and energy for no extra profit. The added value the renovation brings must significantly outweigh the costs you incur.
2. Don’t overcapitalise
One trap many novice flippers fall into is overcapitalising. They rightly identify that renovation has scope to add value, but then get carried away, spending too much on the project on areas that won’t make a difference at sale time. Part of your pre-renovation due diligence should developing a picture of the target market for your property and what they are looking for. You may think that marble benches look wonderful, but if they’re not on the wish-list of your potential buyers, you may be flushing away thousands of dollars. Don’t spend a cent on anything non-essential.
3. Do spend money where it matters
Know what your buyers want. Visit open homes and study recent local sales to find out what the key factors are in achieving higher prices. You might find the area you are considering flipping in is full of young families who are into outdoor living. In this case, it may make good sense to lay a deck and create an outdoor living space where would-be buyers can entertain. Maybe the biggest buyers in the area are empty nesters who don’t want a fussy garden. Maybe there are large families in the area who really need an extra bedroom. Do your research and let the market guide you.
4. Have a realistic estimate of what things will cost
There are plenty of online tools that will help you calculate the costs of renovation. They provide a useful guide, but anyone who has undertaken any kind of building project will tell you that costs tend to blow out, and there is no accounting for the unexpected. If your renovation costs are high and the margins on your flip are relatively small, you may want to reconsider the deal. You will need a significant buffer to ensure your profits aren’t eaten up by the inevitable blow-outs.
5. Consider a low-cost approach
Not all renovations need be costly. Depending on the property and the market, some relatively low-cost cosmetic renovations can add real value and may be all you need to turn a healthy profit. Some of the basics include mowing the lawn, tidying up the yard and washing the windows. You may want to invest in some paint to touch up the façade. A trip to the local nursery will help you add colour and life to the garden, and it’s amazing the charm that a new letterbox and some shiny street numbers can bring to a property.
6. Use reliable tradespeople
When you’re trying to keep costs in check, going with the lowest quotes for the various renovation tasks is tempting. The fact that you won’t be living in the property in the long term can also make cutting corners attractive. Afterall, what does it matter if the paint starts to peel in two years? But beware. If a quote seems too good to be true, it probably is. Having a tradesperson who fails to complete the job when promised, is lax with safety, or who shoots through without completing their duties will delay your project, increasing any interest repayments you need to make, and jeopardising your profitability. Go with reasonably priced tradies with a proven track record of delivering what they have promised.
7. Factor in your own time
The primary reason most people get into flipping houses is to make money. Don’t lose sight of this, especially when you’re doing your calculations to see whether a particular renovate-and-flip project is viable. Imagine you buy a property for $500,000. You spend $100,000 on renovations and sell it for $630,000. After all your expenses, including interest payments and sales and marketing costs, your profit is $15,000. If you spent 50 hours pulling the deal together, you effectively earned $300 per hour. Amazing! But if it took you 300 hours, your hourly rate was $50. That’s quite a difference. Be sure the amount of time you will need to invest in making things happen is reflected in the final bottom line.
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