Make Money In Property Through Renovation?

With all of the books and TV programmes around today, it can be hard to avoid the concept of making money from property, through renovation. However, just how viable for the newcomer is it to make money in property by completing renovation projects?

Deciding to be a property developer

There’s no denying that the whole idea of buying a run down property, knocking down a few walls and slapping a bit of magnolia paint around and then making a mint sounds appealing. But very few new property investors really understand the market well enough to be able to make the windfall gains that lure us into these projects, in the first place.

One of the issues that is so commonly overlooked when it comes to renovation is what you intend to do with the property once it is complete. Are you going to keep the property and use it as a buy to let property or do you intend to sell it on, as quickly as possible. If it is the latter, which market are you targeting in terms of sale, family homes, first time buyers or other buy to let investors?

Common errors that cost developers dearly

With so many people seemingly making an absolute fortune by developing property, it appears that the entire process is child’s play. In reality, however, there are many potential pitfalls that can soon eat away at any profit you would have made.

Planning is fundamental at every step. Plan the purchase, plan the development and most importantly plan what you are going to do after the project is complete. In particular, pay attention to your costs. It is almost unheard of for a development to run under budget and most go over budget. A recent survey revealed that the average project overruns by 13%, so build in a contingency of at least 10% in any cost planning.

So many new developers and investors get emotionally involved in the property and end up adding expensive touches simply because they would like it in their home. Whilst you may love glass floors and open staircases, will this really be attractive to your average young family? As a general rule you should plan to do essential work such as wiring, double glazing and drainage; beyond that you should only carry out work that is going to add more value to your property than you will have to spend in doing the improvement in the first place.

Go through the property and write a list of all works that you would like to complete and then sit down, away from the property, and look at your list with a businesslike brain. Cost the works and consider what the work will do to the asking price (whether this is as a sale price or as a rental price). If you are really struggling, try categorizing the work into three columns; essential, ideal and non-necessary, this will help you get things into perspective.

Has the boom already happened in property development?

Given the number of people who are now involved in property development, it may seem that this is no longer a good way of adding value to a property. To make money by quickly purchasing a property and then selling it on immediately after renovation has become considerably harder, in the last few years. Two years ago, the property market in its entirety was rising at a relatively rapid rate of 11.8% increase on average in 2004, according to the Land Registry. Therefore, anyone purchasing a property, ‘doing it up’ and selling it on was likely to make money by virtue of the rising market, even if the actual real profit was relatively minimal. Today, with a combination of a large number of savvy developers snapping up the bargains quickly and the more stable property market, making money is a lot harder.

As part of a long-term investment, however, development can still bring large rewards. Consider for example a run down property that is purchased for £90,000, with an 85% interest only mortgage, the monthly payments are approximately £400. After renovation, which cost approximately £30,000, it is then possible to rent the property out for £600 a month, leaving £200 clear on a monthly basis. All the time, the property is gaining in capital value. A word of caution, however, when calculating rental yield; the total outlay should be used, so in this instance it should be worked out based on £120,000 and not £90,000. Presuming that the renovations have resulted in at least a small gain in the value of the property to say £130,000, as an investor, you will see that the figures now look reasonably favourable, largely due to the renovation work.

Another potential advantage of this approach is that you now have a £90,000 mortgage on a £130,000 property which would allow you to re-mortgage and release the equity to use as a deposit on another property, leaving you with a property that is generating a decent rental income, covering its own costs and one which is not using any of the money that you put down originally.

Renovation is not for the faint hearted, but can offer a whole new approach to dealing with the buy to let market.

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