Many investors are turning to renovations to add value to their properties, but when they do the sums at the end of the project, some are disappointed with their lack of profit.

Over the years I have been personally involved in many successful property renovations, and in the last few years I have specialized in acquiring properties with renovation potential for our clients at Metropole Buyers Agency, so I would like to share some "insider tips" on how to make predictable renovation profits.

Firstly I would like to explain that it is very, very difficult to make money out of a buy, renovate and sell strategy. When you take into account all the costs including agent's commission, GST and tax there is so little profit left that many renovators wonder why they took the risk of undertaking a renovation project.

What works really well, if done correctly, is a buy renovate and hold strategy. Here you buy a property with renovation potential, do your renovations and keep the property as a long term investment having added value. This added value will give you improved rentability, a higher rent and you will have "manufactured" some equity. In time you can refinance against this extra equity, pull out some or all of your funds and use them to buy your next property and start all over again.

But as I have already explained, at the end of the day, most renovators don't do well out of their projects. This often occurs because they pay too much for their property in the first place.

Now in our rising markets, not only in Perth and Darwin, but in also in the suburbs we specialize in, especially in Melbourne and Brisbane, there are few bargains to be found, but you still need to buy well to underpin your renovation project's profit.

When you ask most renovators how much they are willing to pay for a property, they usually say something like, "Well, the asking price is $375,000, so maybe I can bargain that down to $350,000."

That's how they decide how much they are willing to pay for the property and that kind of thinking makes no sense. To make sure you make a profit from your renovation project, you need to work backwards to arrive at a fair purchase price.

Firstly determine your estimated end value after the renovation. This will be the new value of your property for after you have improved it. Look at comparable sales in your area, determine whether the market is going up or down, and understand exactly how much your property will be worth.

Then, total up your projected expenses. These generally include:

• Purchasing costs - including stamp duty, solicitor's costs and loan fees.
• The cost of the renovation - try and stick to cosmetic work that can easily be seen, rather than structural works that tend to be expensive.
• Outgoings during the renovation process - including rates, electricity, insurance and interest.
• Hidden costs - depending on the age and condition of your property, you can expect that something unexpected will go wrong - that's why we stick to buying apartments in sound buildings that tend to only need cosmetic makeovers.

Finally, subtract your projected expenses from your estimated sales price.

For example, let's say that you realistically expect the end value of your renovated property to be $400,000 and your projected costs are $40,000.

That means the maximum sum you should pay for the property is $360,000, otherwise, the deal makes no sense.

Actually, you should buy the property for far less than that. After all, you are investing in real estate to make money. If you are not making money, what is the point of going to the trouble to undertake the renovations?

Of course the renovation process also needs careful planning.  We have seen so many seemingly simple renovations come unstuck when the renovator doesn't carefully plan and cost the renovation prior to starting.

Ensuring that your costs are minimized and your program is tightly controlled are essential elements of any renovation. Careful scrutiny of suppliers and supply times, availability of skilled trades to keep the job on track and on time and maintaining quality and finish standards, eliminating reworking and delays are also critical to ensure the renovation actually works.

A recent case study of just this type of renovation project is a property the team at Metropole Buyers Agency  bought for a client in Ormond, a south eastern Melbourne suburb.

The apartment was a neat ground floor 2 bedroom apartment in a 1970's built block of  8 apartments a few minutes walk from the local shopping center, train and bus. The block was structurally sound, but the apartment was "tired."

We managed to snare the property for a great price - $270,000 and organised all the renovations. For around $25,000 the builder gutted the kitchen and installed a modern new kitchen with stainless steel appliances including a dishwasher. The apartment was painted and re-carpeted and all light fittings were replaced. All the door knobs and cupboard handles were replaced and a new heater was installed. The bathroom was in good condition, so we kept the tiles and just replaced the vanity.

We don't know exactly how much profit our client made in doing the renovation, as it has just been completed (the works took about 4 weeks) and the banks are unlikely to revalue the property for a few months yet.

We do know that Pamela Yardney's team at Metropole Property Management let the property before the renovations were completed for just over $50 per week more than the previous tenant paid. I would suggest that Sergio probably added $1.50 in value for every dollar he spent on the renovations and now he owns a top performing investment property with good rental returns and some depreciation benefits.

Would you like to own a property like this?

Well you could - Metropole Buyers Agency specialises in helping investors identify, acquire and manage top performing investment properties in Melbourne and Brisbane. By the way, many of our clients are from interstate, so give Warren Loone a call on 1300 20 20 30 to discuss your options.

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