Most of us will have at least seen some of the many renovation shows on television and it can be exciting to see the transformation from a run down, tired and dated house to a gleaming, landscaped and modern home.

The concept of buying a property to renovate can be attractive. It gives you the opportunity to input all of your creativity, ideas and hard work into improving a property to sell at a higher price. The idea of renovating is simple right?

 1) Buy a property in a good area that could benefit from a renovation.

2) Hire contractors or even do it yourself to knock down walls, paint ceilings and install new kitchens and bathrooms. 

3) Sell your new look property at a higher price pocketing the difference and walking away with a fistful of dollars.

But have you ever asked yourself, does renovating really stack up financially?  And is it the best way to create wealth for the long term?

Let’s take a look at two case studies that can help illustrate some of the real costs often involved with taking on a renovation project.

Case 1

A couple purchases an older property with the view to renovate and sell it for a profit in four months. The have bought the property for $350,000 and have budgeted to spend $75,000 to overhaul it. This will include improvements to the kitchen, bathroom, new paint and landscaping. To help reduce contactor costs, they have taken leave from work for the 4 months in order to participate in and oversee the renovation. They hope to sell the property for $475,000 providing everything runs on time and they have the property ready for sale. When it comes to renovating, especially when the work is carried out by non-professionals, some of the biggest dangers are going over budget and over time. Each goes hand in hand, as time is money. In this particular example, our couple are forced to extend both. Despite their best efforts, the project takes a further two months to complete and ends up costing a further $5,000 to fix a mistake made by one of their trade contractors.
At long last the property is ready for sale and they achieve their original goal of $ 475,000. That’s a profit of $125,000 right? Not bad for six months work.

Let’s take a look at the real costs of their renovation project. Taking into account their $ 5,000 budget extension, the renovation costs totalled $ 80,000. This reduces their profit to $ 45,000. Of course the real estate agent would like their share. Another $ 13,000 gone. By the time they factor in lost income from the six months off and capital gains taxes, their initial profit has been turned around into a $53,000 loss.

Due to budget extensions, time delays and costly time off from work, this couple has had to accept a loss in return for their six month renovation project. This isn’t even mentioning the stress of attempting to manage a significant renovation project like this.
 

Case 2

A young man purchases an inner suburban Brisbane property for $300,000 in order to renovate and sell it in six months. He has also taken off this time from work in order to complete the renovation himself. This can be a common idea amongst people looking to flip a renovation for profit. Taking time off to manage the project can reduce the amount of time taken for the renovation to reach completion. Going for a smaller renovation, he has allocated $30,000 for the refurbishments.

In six months he has completed the renovations and manages to sell the property for $430,000 pocketing a profit of $100,000 after subtracting the renovation costs.
Once again, let’s break down the real costs. Following six months of hard work, he has walked away with a total profit of $33,000. What would have happened if initial cost estimates had blown out to double? Budget blow outs are common in renovation projects. What if instead of six months, the renovation took 12 months to complete? Renovation time frames often have to be extended, especially when you are doing the work yourself. Had either of these scenarios taken place the profit could have been whittled down to just a few thousand.

Unfortunately, the scenario typically seen over and over again is that people lose money on renovations and we have heard the phrase ‘Things went wrong somewhere’ more than once. This certainly isn’t to say that people don’t make money. There are professional people who have the skills and experience necessary to successfully make profits from property renovations. The question is whether there is an easier way?
Here’s another point to consider. In 6-12 months the property has appreciated by 10%. Without lifting a finger he would have made $30,000 in equity growth. Instead of paying addition capital gains taxes, he could have actually reduced his tax through deductions made on the property. There also would have been no requirement to take time off from work to complete the renovation. The six months worth of income would have stayed in his pocket, as would the initial $30,000 in renovation costs.

This example highlights the benefits of allowing time to create wealth through capital appreciation. It can be much less work and stress while still allowing you to capture substantial profits.
Renovating a property can be a rewarding experience as it gives you the opportunity to input your ideas into adding value to the property and further to that, if you are looking for work, this is now your ‘job’. As we’ve seen in the shows on television, renovations can easily turn into budget blowing nightmares than run months past their original expected timelines. This can be a stressful experience that can leave the most hardened renovators frazzled. The risk can be higher for those that are inexperienced in the world of renovating, building and dealing with contractors.

 This is the real question. Can buying, renovating and selling make money? The answer is, definitely. Regina Rowlison from The Inhouse Concept Store shares a few tips on the next page should you decide to renovate and add value to your home. But what we should ask ourselves as wealth creators is, could there be another way, a better way?
There is, and it follows a strategy more focused on capital growth and appreciation rather than realizing short term cash returns.

By buying in a solid growth area, capital appreciation can do the work of renovation. By using one of the tools of wealth, time, you can realize the growth on the property without having to lift a paintbrush or take to a sledge hammer. In addition, you don’t have to sell the property and give money back in the form of capital gains tax, stamp duty and real estate commissions.

You can use the growth in the property to leverage yourself into other properties. Your portfolio grows and compounds creating you more wealth than renovating possibly could.