A GUIDE TO RENOVATING FOR HIGHER PROFITS: 3 LEVELS OF RENOVATION AND PROFIT MARGINS
This brief article will guide you through the different levels of renovations that can be carried out on a property and the impact your decision-making process might have on your profit margins. It will also briefly touch on the perils of bad due diligence and planning during a renovation project (overcapitalising vs under-capitalising). It will also give you an idea of what can be done in order to maximise profits while sticking to a given renovation budget.
3 levels of renovation
Before going into the concept of profits and return of investment let’s see what types of renovations a property might need in order to make some profits.
Renovations project can be divide in three broad categories: Refresh, Refurbish, Remodel/Extend
A) Refresh - aka Basic Cosmetic Refurbishment
This is the simplest and often quickest type of renovation to undertake. It simply improves the appearance of a property at superficial level.
Generally speaking, a cosmetic renovation is, as the name suggests, a renovation that improves the physical appearance of the property. It might involve repainting walls, painting cupboards and woodwork, updating flooring, replacing taps and doors hardware, updating light switches and sockets, and undertaking some landscaping work.
A cosmetic renovation is, a renovation that improves the physical appearance of the property.
B) Refurbish - aka Higher Cosmetic Refurbishment
This level of renovation includes some or all of the basic cosmetic renovation items and adds to it the big ticket items within a property, such as the kitchen or bathroom. It might therefore include a new kitchen re-fit, new bathroom re-fit, new doors, skirting boards, mouldings, windows, roof, water drains, adding driveways.
Higher Cosmetic Refurbishment includes some or all of the basic cosmetic renovation items and adds to it the big ticket items within a property, such as the kitchen or bathroom.
C) Remodel/Extend - aka Structural refurbishment
This is the most involved level of renovation which generally aims at solving a current problem. For example, moving a bathroom to the upper floor from the ground floor, or enlarging a small kitchen into a family kitchen/diner, converting a loft space, converting a garage, and so on.
Structural renovation can be divided in two categories:
1. under the existing footprint of the property - for example work on the foundations, moving or removing walls moving electrical work, or redirect plumbing/
2. beyond the existing footprint (i.e. adding an extensionto the existing footprint) this level of renovation is certainly more complex and expensive than any of the above mentioned options, but it has its place in renovating for higher return on investment - for the right property in the right market.
Structural refurbishment generally aims at solving a current problem. For example, moving a bathroom to the upper floor from the ground floor, or enlarging a small kitchen into a family kitchen/diner, converting a loft space, converting a garage, and so on.
Although structural renovations generally add value to properties, poorly designed renovations can have a detrimental effect and can detract from the existing spaces. As I like to say, it never is a case of “one fits all” approach and it is somewhat detrimental to create lots of smaller spaces in the attempt to add en extra bedroom… which nicely bring be to the next paragraph…
WHICH RENOVATION GIVES THE HIGHEST PROFIT?
Each of these depths of renovation has its specific qualities in terms of the work involved and the returns they can bring. There are positive and negative elements to each of them.... For example, a refresh and a refurbish can be completed within a short time-frame and in many cases without planning approval being required (thus positively impact on running/holding costs and cost of money) while structural renovations may take longer, require planning approval and a higher budget (thus negatively impacting on running/holding costs and cost of money). Equally though, the potential return on investment of the latter depth of renovation is potentially much higher (with the right design decision and in the right market conditions).
Again, one fits all approach does not exist and the basic questions for any of the options above are :
What are the cost to do the work?
What does it add in terms of equity and/or rental returns?
Two concepts that might help with deciding on the level of renovation to undertake are:
Overcapitalising
Even when you purchase the property at a great price, there is a danger you can overcapitalise during the renovation process. Overcapitalising, in simple terms is the process of improving a property beyond its resale value. It is important to mention that avoiding overcapitalising on a property is not just about sticking to a budget; it is also about planning well, being realistic and removing any emotional variable from the equation of the project.
Overcapitalising
The opposite end of the spectrum is the pitfall of overcapitalising the work you undertake. Overcapitalising occurs when a decision about an element of the renovation results in an area of the project not meeting market expectations or the quality of finish the property demands. Overcapitalising on a property could significantly jeopardise profit margins.
Due diligence and good design practice. both play an important role here. The first step on any renovation project is to understand what your market wants. Some of the things you need to consider include: number of bedrooms, number of bathrooms, living space, outdoor area, land size; Parking, quality of finish expected and overall appeal of the property.
how to RENOVATe FOR HIGHER PROFITS within a budget
There are three widespread believes around property renovations and profit margins:
in order to make a property appealing to the broad market a developer must stick to neutral and basic
producing a unique product costs more than designing a plain product
creating an additional bedroom will always increase the value of a property
I personally do not believe that the three above statements are true. Instead, while I believe that deciding on the type of renovation to undertake on a property is an essential step that needs careful consideration, I would say that
creating a unique product will increase profit margins as long as the unique product appeals to your target market
it is the quality and type finish of fixtures and fittings that will determine overall costs (not the neutral and basic as opposite to unique and attractive)
the work required is influenced by the property location, target market requirements, and ceiling price for that particular property
In broad terms I would say that
the work required when refurbishing a property is dictated by the overall decoration state of the property at the point of acquisition (and therefore a specific list of must dos, should dos, and could dos)
the type of renovation to undertake is guided by the primary exit strategy (i.e. a refurbishment to flip could be different from the refurbishment to undertake on a property that is intended to hold and let)
the quality and type finish for fixtures and fittings will be different in terms of aesthetic/appeal and durability/ maintenance depending again on your target market and your exit strategy
Budget is always at the core of your profit margins and budget should always include a contingency for any unforeseeable event.
One way of sticking to a budget while navigating though the decision-making process during a renovation project, is visualising alternatives and final results prior to undertaking the project itself.
One way of sticking to a budget while navigating though the decision-making process during a renovation project, is visualising alternatives and final results prior to undertaking the project itself.
Visualising ensures that money is spent on the right elements and the budget is distributed adequately, prior to the project starting. Visualising also ensure that the market requirements are met, that communication with trades are facilitated, and that any contingency element can be absorbed into the project seamlessly and on time.