Planning an Investment Property Renovation? You'll need a renovating budget!

This past month I have had the opportunity to view two properties that were potential flip properties.  Both properties happened to be in foreclosure and both were in dire need of a massive renovation.  While both had great potential, it was important for me to create a renovating budget to see if these properties could be renovated and sold for a profit.  There's not point in purchasing a property if there is no ROI (return of investment).

Renovating Budget

For the sake of this blog, I'm going to be using one of the properties that I viewed that is 1021 sq ft, has 2 bedrooms and 1 full bath.  There is an unfinished basement with rough-in plumbing for an additional bathroom. This particular home falls in the 'starter home' category.

Kitchen

As you may know, kitchens tend to draw the biggest attention for potential buyers.   In looking at an estimated budget for the kitchen, it's very easy to pick a number out of thin air and make a guess.  Would I suggest that?  Absolutley not.  When creating a renovating budget for property investments, it is important to think ahead and be proactive with a budget.  There is nothing worse that either over renovating and/or being over budget!When I went to visit this home, I took care and attention to measure the kitchen as I knew it was one area that needed to be gutted.  Here is a picture of part of the kitchen as it currently sits.In just looking at the kitchen, I originally thought it was perfect.  There were not a lot of cabinets to change out, it was a really good size, and it definitely had potential!  I'll admit, I was excited!

Bathroom

Next to kitchens, bathrooms are the next spaces that get a lot of attention from potential buyers.  In this particular house, there was only one bathroom and all it needed was a facelift.  I started to get excited more thinking of the potential.

Rest of the house

The rest of the home was going to need some TLC!  New flooring, new interior paint, newly painted baseboards and casings, newly painted doors (they were in good shape and could really use some fresh paint), and all of the ceilings were going to need to be either repainted or resprayed. The image below may give you a sense of the state of this home's interior.If you take a quick look at the wall and the cold air return, you will quickly see how filthy this home currently is.

Pulling it All Together

The Potential

After viewing the property and spending quite a bit of time with my contractor and my real estate agent, I was pretty excited about the potential of this property.  What really got me excited is that I would be able to turn this home from basically a shit-hole into a home for someone where they would love coming home to every day.

Renovation Budget

When I got back to my office, I started to pull numbers together.  My contractor also started to pull his numbers together for his his labour and work that was needed.Knowing that this was a starter home, it was going to be important for me to choose finishes that would not fall into the 'over renovating' category.  I was looking at stock cabinets from a big box store or IKEA cabinets for this home.  I was also looking at very economical finishes such as taps, sinks, flooring and carpet.

Keeping Track

I use a system that I have created to help me pull my numbers together pretty quick (and by pretty quick I mean in one day).  In my system, I have everything listed and a price associated for each line item.  I have this system broken down into categories:

• Appliances
• Cabinets, counter and hardware
• Doors and Windows,
• Electrical
• Plumbing

to name a few.  Each of those categories are broken down to include everything and anything that may be needed.  Below is a sneak peak at my list.

Numbers Don't Lie

By having this system in place, it was easy to pull a potential renovation budget together to see if this property was going to be one that had a good ROI.  It is important to note that my final numbers included a basement renovation that included a full bath, a new bedroom, a recreation room as well as a laundry room.  Here are how the final numbers came together.For this particular property I have 30% listed for unexpected costs.  While this may seem high, this particular home was in foreclosure so it is a 'sold as is' property.  I wanted to make sure that there was money in the budget for any curveballs that this property may throw at me since there would be no home inspection allowed.

Renovating Budget: Final Results

By having my system in place, it was easy to discuss the numbers with my real estate agent to see if this was going to be a property to proceed with.  When I take the asking price of this home, incorporate a very lean renovation budget (and by lean I mean I had gone over my renovation budget a number of times to tweak and make changes to tighten up the budget), and then look at what the property could be sold for (looking at all the comps in the area), it was clear.  This property was going to be a no-go.  Although I would love to get my hands on this one and create a beautiful home for someone, the asking price would have to come down between 15-20K for it to be worth my time and effort.In one week I went from being super excited to super bummed.  In the end, I know this property is not the one (unless they price can come down).  I' will be watching it like a hawk to see if there is some room to move with the price.  Meanwhile, I'll be continuing my search for my next flip.

Are you a property investor that would like someone else to do all this work for you?  Contact me today to discuss your next investment! 

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