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How not to overcapitalise on a renovation

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Buying up run-down homes with an eye to renovating and reselling them at a profit has become very popular in recent years, but such projects are becoming more risky, as rising interest rates could put a damper on both housing demand and property price growth.

“There may be some good opportunities to acquire properties more cheaply in the coming months as more consumers encounter financial difficulties, but there is also a serious danger of overcapitalising on renovations,” says Bill Rawson, chairman of the Rawson Property Group, “and the same goes for owners who are thinking of upgrading their own properties to make them more appealing to potential buyers.”

To overcapitalise simply means spending more money on the renovations than you can recoup on the resale of the property at a later date, and it is an especially important consideration if your plan is to “flip” the property – that is, to sell it as soon as possible after the upgrade is finished, he says.

“Consequently, the prime rule for sensible renovation is to determine, with the help of a knowledgeable local estate agent, the current top values of homes in the area and then compare these to the current value of the property you are planning to renovate.

“The difference in value is of course the maximum sum that you can possibly risk spending on renovations, although if you want to make a profit, you will need to make sure that you can complete the upgrade for considerably less, or negotiate a lower price.”

In addition, he says, you really should have the property checked by professionals to make sure it is structurally sound before you even consider signing an offer to purchase. “This is even more important than usual in the current market, when renovate-and-resell margins are getting thinner and one unforeseen expense to fix a major problem could really make all the difference between making a decent profit and taking a big loss.

“If the inspection reveals that the property needs work on the foundations or a new roof, for example, your initial price advantage could quickly be eliminated by the cost of the work and materials, and if it requires additional construction outside the original exterior walls, the price may be just too high.”

Rawson says other potential money-pits to avoid are the need for re-wiring and new plumbing, “but if there really is no major work to be done, it should be a simple matter to calculate the cost of the materials and work needed to complete the planned revamp, and for you to make an informed decision about whether the property is worth buying.

And not all improvements are costly. New paint, light fittings and flooring can do wonders to brighten up a gloomy interior, and a few weeks of hard work in the garden can give the exterior a whole new look, while the removal of overgrowth might even reveal an unexpected view that adds considerably to the potential resale value.

As for other items, the ones that traditionally give the best return on investment, he says, are the addition of an extra bathroom in a one-bathroom house, the modernisation of the kitchen and the conversion of an outbuilding into a flatlet or home office.

“It is also important that you stay focused on the fact that you are not preparing the home to live in but for resale. Your renovations should thus not be personalised but directed to presenting potential buyers with what they want most – a solid, safe home with a good floor-plan that is in good condition and will not be expensive to maintain.”


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