Profitable Property Renovation - What You Need To Know
Renovating a property strictly for profit is not something you would ordinarily do for your own home, this is a business transaction and needs to be viewed as one. Of course we do aim to add value to our own home in the hope of selling at a profit one day and moving up the property ladder to a bigger home, this is often dictated by the market changing over time, whilst we also modernise and decorate the home in the meantime, to suit our tastes and quality of life.
What we are looking at here is renovating a property specifically for profit via a quick sale, often known as ‘flipping’, or making a property suitable for letting out to tenants, often known as ‘buy-to-let’. So this article is not looking at how a DIY enthusiast would approach a property renovation for their own enjoyment, we are looking at how an investor or developer would approach it.
Renovating a property can be both exciting and daunting, it is difficult to know where to start, but experience is vital and can only be gained by approaching each project in a structured and organised manner to make it a success. This is what we will be looking at in this article, so that you are aware of the process involved, the planning and awareness required and the contacts you will need to build up. Ultimately, the goal of a property renovation is achieving a return on your investment. There is an awful lot to juggle and balance in order to achieve that, but by making good decisions and having an organised plan, renovating a property can be a lucrative investment.
Why should I renovate a property?
Whether you intend to renovate the property to flip it, or to let out to tenants, the objective of renovating is to add value to the property in the current market. So to take a very basic example, you could buy a property for £100,000, spend £30,000 renovating it and then find that it actually has a market value of £150,000. If you sell it for that then you have made £20,000 profit in what might be just six months.
Capital growth is also the ultimate goal in the BTL market, ie. eventually you will sell the property, but here you have a secondary source of income in the form of rent. A tenant will pay monthly rent and help you cover costs of the mortgage and associated costs of the renovation. This can help you manage these costs until such time that you decide to sell the property, which can be dictated by the market or your personal and business circumstances. Some property developers or BTL landlords have three or four BTL properties on the go at any one time, if you can manage them all then there is money to be made, but a big renovation project can be time-consuming and very risky, so these are specialist projects that require a lot of finance and planning.
The key to making a profit on a renovation is spotting the potential in a property and having a good eye for the value that you can add. It is OK finding a property you can buy cheaply, but is it in a location that will ever bring the value that you need? Taking the above example, if you buy the property for £100,000, is anyone ever going to pay £150,000 for it? Or is there a ceiling value on that street or in that area? You might end up having to pay £50,000 to improve the value to £150,000, and then all your profit is gone. Or you might do that and not be able to sell it, and you are stuck with a money pit and an expensive white elephant. So knowing the market, spotting potential and envisaging rough costs, is vital at the stage when you are identifying suitable properties.
What do I need to think about when renovating a property for profit?
There is an awful lot to think about when looking at a property for renovation, and this starts before you have even found the property. You need to create the personal circumstances in which you can devote the time and energy, because a full scale property renovation can be a full-time job and managing a BTL property can be a drain on your time also. So in addition to establishing whether you have the ambition and personal characteristics to dedicate to a project, these are the factors you need to consider.
It can be very difficult to identify a property with sufficient potential, and estate agents are very good at upselling a property which might be hiding a dark secret. A cheap property might be a cheap property for a reason, ie. it is in very bad condition and would cost too much to bring back to value, and that value might not be enough to return a profit. Equally, it might be in a location or neighbourhood where it will never increase in value, at least not enough to cover what you spend on it. There are only a limited number of properties that can be bought cheaply and yet still retain the potential to be renovated cost-effectively. That means to turn around a profit upon sale.
In terms of BTL, you also need to think about your target market for potential tenants. Is a family going to want to live in a street with a poor reputation? Will students want to live in a leafy suburb miles away from their campus or the town centre? Any period of time where a property is vacant is costing you money, and spending time finding prospective tenants can also be costly.
So sourcing a property with development potential is difficult, and such properties will be sought after and could lead to a bidding war, where any potential profit is subsequently reduced.
There are a number of online methods you can use to research the typical value of properties in a certain street or location. This should give you a good handle on the potential of a property and what kind of outlay will be cost effective, or whether a certain property will cost too much to bring up to value. In one street you may only need to spend £10,000 to make a property liveable and fit to rent out, and you will be able to see whether it is an area that should attract a steady market of potential tenants. You can also see what similar properties are going for, and whether the property you have an eye on has the potential to reach that value.
You will need the help of a number of different professionals in order to establish the true worth and potential of a property. You need to be aware of local planning issues, what building consents you will need, and you will need to have surveys carried out on the property. This could unearth problems with damp, subsidence or drainage, amongst other things. These might not be apparent on a first viewing, but can add considerably to your costs and make a project non-viable. At the same time, you need to enlist the services of an architect to draft out plans to renovate the property. This might also involve a structural engineer if a reconstruction of walls or internal structure is required. In addition to this, of course you will need legal assistance as you would with any property transaction.
Quite simply, how are you going to pay for everything? It is one thing working out a budget, but another to actually find that money and ensure it is always in place and accessible. As well as sourcing a suitable mortgage, you might also need to consider short term finance products such as bridging loans, these might help you get out of a tight spot and are quite common in property renovations. With BTL the situation is a little different, in that you hope to see income from rental payments quite quickly and this can cover some costs, but many people allow themselves a contingency fund to deal with periods where this income is delayed or not forthcoming at all, and also to cover unforeseen costs that inevitably do arise during a project.
It is very unlikely that you will be able to carry out a full renovation yourself, however handy your DIY skills are. So in addition to the list of professionals we referred to above, you are going to need to build a network of reliable, trustworthy, affordable and skilled tradespeople. So these will be project managers, builders, electricians, plumbers, plasterers, joiners, roofers and even landscape gardeners. Often these are people you already know or have used before, and they also become people you can build a long and fruitful relationship with. If this is to become a career you need to have people you can rely on and who you can get in contact with fast. Inevitably, these then become people who will go the extra mile for you, which can be critical in cutting costs and making a project profitable.
There are a huge number of costs surrounding a renovation project, and some of them will need to be paid to pursue a property that you don’t eventually buy. However, we have already stressed the importance of getting professional assistance with surveys, legals and building regulations. These are integral to a project going ahead at all, and hence are a very necessary cost. In addition to this you will face valuation fees before you have bought the property. You may face reconnection fees for utilities in a property, if it has been vacant for a period of time. You will face council tax costs, stamp duty, insurance costs and you will need to build yourself a contingency fund to cover unforeseen problems.
In this kind of project, people often set aside a small amount to pay themselves a working wage. This may only be minimal, but it is another cost that needs to be budgeted for, and of course this all comes before the direct costs involved in the renovation itself.
Often this is dictated by budgets and costs, but you need to have a good handle on planning each stage of the project and how long it will take. Do you have the money to cover this? Do you need the income from rent to cover costs? Inevitably jobs will be delayed or will over-run, can you accommodate that? Can you still pay for the labour? Often, this is where short term bridging finance comes into the equation. A project being delayed can also influence the value of a property in the market. If a location is rising in value quickly, you might want to finish the work and get the property on the market as soon as you can, to maximise its value. Delays can hinder this. But this is a balancing act between getting the work done right and getting a return on your investment, and it rarely pays to cut corners. But essentially, you need to closely monitor timescales, and make sure you are ready to fill the property with tenants or put it on the market to sell.
This is perhaps the most important aspect of a renovation project and the key to it being profitable, and effectively means; what is your ultimate goal and how do you plan to achieve it? Your ambition might be to flip the property quickly within six months or a year, it might be to rent it out for ten years and hope the market provides you with a profit when you sell. All your work and decisions should be aimed at making that exit strategy achievable. And combined with this, your exit strategy should include a trigger for knowing when to walk away. Sometimes you need to accept that a project is not going to return the objective you initially established. This realisation may come too late of course, but if you have the foresight, advice and knowledge, you may see the sign that you should back out before you make the purchase, or in time so that you only break even on a project rather than make the profit you originally envisaged. This is better than not having this visibility at all, or ignoring the signs and making a potentially damaging loss.
How to renovate a property
In understanding how to renovate a property, we first need to establish exactly what we mean. Yes, a property might just need decorating or some new carpet to make it liveable or sellable, but this is not going to add significant value. Equally, ‘renovating’ means bringing something back to its former state, so inevitably it means that a property has deteriorated in structure, condition and value. If the property has period features, such as a fireplace, stained-glass windows, period coving or architrave, feature staircases or a parquet floor, then these are valuable features that people will pay money to have in a property. This is the true meaning of renovation.
But by renovation, people often just mean ‘modernising’ or ‘remodelling’, which can also add value to a property. So this can be updating the bathroom or kitchen, changing the layout of rooms, undertaking a loft conversion or adding an extension, in other words, adding something that wasn’t previously there.
Most property renovations are a combination of both, ie. restoring existing features and creating new ones. In terms of maximising the value of a property and realising potential, there is nothing wrong with that.
So what do you need to consider when planning and undertaking the restoration?
**Budget **– have this planned out and keep a close eye on it, making adjustments and allowances accordingly. You will need to be looking a few weeks ahead at all times to be able to foresee where finance will be required and to ensure you have the money in place to cover it.
Demolition costs – before you even start you might see the property go backwards before you see any progress. So unsafe or badly deteriorated walls or features may have to be removed in order to renovate the property. At all times you will need to safeguard period features that you intend to keep and restore, so they don’t get damaged.
Site access and safety – the property is going to become a construction site and you need to make suitable precautions for the safety of yourself, contractors, neighbours and members of the public. You need safe access to key areas of the site at all times, you need to leave it safe overnight and at weekends and you need to avoid issues of nuisance which people can rightly complain about, such as noise, vehicle disruption, public damage to pavements etc and dust and dirt.
Infrastructure – when a site is empty and safe, this will be a good time to address the infrastructure of the property. So does it need rewiring, re-plumbing or new central heating? You should have surveyed and costed this already, and whilst it is expensive, it is necessary from a safety viewpoint, and also acts as a good base for accommodating the projects that make a property individual and attractive, ie. bathrooms and kitchens.
Internal projects – in terms of adding value these can be creating new dining rooms or open-plan kitchen/diners. You might knock through a dining room into a sitting room. You can create a downstairs toilet or a utility room. Upstairs you can create a bigger bedroom or a home study, or add an en-suite to a bedroom. We have also talked about loft conversions, or even modernising a cellar downstairs, if you have one. All the while, you have features such as flooring, tiling, lighting and wall decoration which all add value if done well.
External projects – In some properties front-facing renovations add ‘kerb appeal’ and can immediately increase the value of a home. So new driveways are popular and front walling and of course new windows throughout. You can also decorate the external walls of the property with render, or re-point the brickwork, or add cladding. Facias and soffits and new guttering are also a good way to improve the appearance and the structural integrity of a property.
Gardens – decking is well established as one of the best renovation projects you can undertake, as the value it puts on a property, outweighs its cost. This is because it is a versatile and sought-after feature for families. However, a student BTL property might not have such demands. So spending money on a garden is often influenced by your market. Outdoor space is precious to a family, so landscaping and maybe a summer house is worth considering, but to young professionals or students, they still want an attractive outdoor area, but it is less critical and needn’t be fitted out or landscaped at the same kind of expense.
Flooring – naturally this is the last thing to go down in a property renovation, but it needs to be one of the first things you think of. Flooring has a huge influence on the feel of a home and can be a big factor in increasing the value. So think about restoring existing stone floors, or installing premium carpets throughout, maybe underfloor-heated tiling in the kitchen or bathroom? Flooring is a big consideration that ties the home together and hence impacts on the value.
Can I renovate a property at a profit?
Yes, of course you can, but only if you control some key variables. Perhaps the most important three things you need to manage most closely are the timescale of the project, your funding and the local market. These factors combined will enable you to manage the project to completion within acceptable time constraints, with funding available to progress key aspects, and to a standard that meets the requisite value expectations in the market.
Achieving all this needs to be set against a meticulous plan, naturally, and one that is closely monitored and is flexible to accommodate changing circumstances. You also need to know when to cut your losses and back out, this could make all the difference in avoiding costly mistakes, and can bring experience that leads to a successful and profitable venture next time. You also need to make a distinction between renovating as a business and renovating your own home. Some of the decisions you make on fixtures, fittings and design need to be separated from your own personal tastes, and instead be focused on what suits the market you are aiming for.
Ultimately, renovating a property for a profit is about managing risk. It is very easy to end up with a costly burden and a drain on your resources, and so you need a commercial sense to spot market opportunities and also building knowledge to manage a project and its related costs. Then you need to apply this knowledge in setting realistic prices, both in terms of a selling price and a rental price, if you are in the BTL market. Only then can you expect to make a profit after all the hard work you have put in.