Investors Ask: How do I avoid over-capitalising?
Q: I have an investment property in Sydney’s inner west that is very much in need of a thorough renovation – how can I be sure that I do not over capitalise? Can I just renovate the bathroom and the kitchen to save money?
A: There are lots of great renovation opportunities in Sydney’s inner west however you need to ensure that enough “pricing disparity” (the range of prices within a suburb) is large enough to warrant you embarking on a renovation.
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To avoid overcapitalising, spend at least 12 weeks going to the open for inspections to get a feel for what prices renovated properties are selling for in your suburb. During this due diligence period, you’ll also uncover what style and the quality level that you renovation needs to be at for the area.
As a general rule of thumb, allow 10% of your property value for your renovation budget (ie: a house valued at $600,000, should technically have a renovation budget of $60,000). Allow yourself this budget and be very frugal in what you buy and at what price and negotiate hard on trade labour to ensure you stay within your budget.
Remember every dollar you save, is an extra dollar of profit earnt. No doubt you’ll have a long list of things you can do to your property that you won’t be able to squeeze into your reno budget. Therefore, only choose to do which things will give you the biggest bang for your buck (eg: updating kitchens, bathrooms, painting, changing floor coverings etc) to ensure you don’t overcapitalise.
Cherie Barber, director, Renovating for Profit
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