As I talk to many of you on my iLoveRealEstate.tv Aussie tour, One question that I was asked was about renovating a property. More precisely, this person wanted to know how many renovations he should make on a particular property and what the cost should be.
Doesn’t sound like a big deal to you? It’s actually a pretty important question. You may not realize it, but it’s easy to spend too much money on reno costs. It’s a mistake that more than a few investors make that costs them thousands of dollars that they didn’t need to pay.
This mistake is NOT ONE that my iLoveRealEstate.tv students would make, of course, because you know better, don’t’ you? But it is certainly a common one that although easily avoided, is often not…
How much should you spend on a reno?
This very common mistake is not about “buying the wrong property.” In fact it has little to do with the actual purchase of a property at all (but it is about price). But how do you determine just who much you should spend on a reno project?
The mistake so many novice investors make actually can be found in a few different areas. Any of them can cost you thousands, if not tens of thousands in unnecessary expenses.
Now, because you’re an iLoveRealEstate.tv student and real estate investor, of course you will know how to avoid these mistakes. But some unfortunate investors will inevitably lose money in one or even both parts of this mistake with the same property!
Beware the tempting deal on the old house!
The first way so many investors spend too much money is by not knowing the true cost of renovations to the property they’re buying. These unexpected costs often come from the upgrades required for an old or unfamiliar property. This is actually not unusual at all.
That’s because even though you may pay a certified property inspector to examine the property for damage, there are many areas that just don’t get covered in typical property inspections. This is a problem with older properties on a large plot of land and “great potential.” Deals like these are tempting. You see a great opportunity to pick up an old property for a very low price.
Sure, you know there will be some deferred maintenance on the property. But that’s why you will likely get it at a very cheap price. This is where things get interesting.
A common scenario is an older property, maybe it’s a custom built house that was built 40, 50 or 60 years ago or more. Maybe the property is on the market for the first time in a generation or longer. The seller may have inherited the property or the owners are now older can no longer maintain the property.
Whatever the case may be, the property may have the usual cosmetic issues that need attention or the occasional termite damage. These are the things you can deal with when negotiating price with the seller. Those things are not your biggest worry, however.
A shocking mistake
Your biggest worry will be the more complicated issues that are often overlooked in typical home inspections. Many of these are related to the electrical and water systems. Electrical systems, which run throughout the house in the walls and ceilings, are often not up to code or just plain worn out. This kind of disrepair requires immediate attention, and more likely, a complete upgrade will be in order.
That means before you even get to upgrade the kitchen or bathrooms, you’re spending a bundle on rewiring the entire house. This should be what you expect in an older property, but often it becomes a totally unexpected, budget busting expense!
Another trap to look out for is additions that have not been authorized by the council. This is not likely to be a problem for newer properties. But for older properties, this can be the case. That 4th or 5th bedroom may actually not be up to code and in fact, in violation of the council policy.
You’re going to need more liquidity
As I mentioned above, the other common unexpected costs you will find in older “bargain” properties is a failing water system. If repairs have been made in the distant past, they still may not be up to code. This can also happen if it was a “do-it-yourself” kind of repair job.
Also, older pipes can be deceptively thin in places that can be difficult to see. Again, re-plumbing the entire house can cost you additional thousands that you hadn’t planned for in your reno budget. This is also avoidable if you know what to do.
Are electrical and water problems deal breakers? Not necessarily. The key point is to identify those problems before the deal has closed so you can use them as leverage in negotiating down the price.
That means you may want to pay for a more in-depth inspection. You’ll also want to check for approvals on any additions made to the property. It will cost you a little time and money, but will save you much more down the track.
Know the neighborhood and reno accordingly
Once you’ve got the property and begin your reno, be sure you know what the neighborhood can bear in terms of rents and sales. If you’re buying a property to reno and then lease to renters, you need to know what the average rent in the neighborhood is. Like wise for property sales.
Avoid the temptation of “over renovating.” That is, you can spend thousands more than need to on a reno, but you know what? The rents in the neighborhood can only be go high.
Find out what the median rent for the area is. Find out what the typical interior grade level is. Then, adjust your reno plans and budget to meet that standard or maybe just above it, your target.
If you spend money on a high grade interior reno, you’ll need to charge a higher rent won’t you? But if you’re renting to low income or lower middle class tenants, they won’t be able to pay the rent you’ll want for an upscale reno. That means you’ll have spent thousands on upgrades that you won’t get back in rental income.
Learn real estate investing the right way…