Reality Bites – Cost of Renovating For Profit
There’s a lot of misinformation floating around at the moment, from the media and popular TV shows that one of the best ways to make money through property is to renovate. Essentially, you buy something that is in poor condition (usually quite old), but in a good location so that it has potential to be valued at more. Then you “do it up” yourself as quickly as you can and then sell it for a profit.
Is this a good strategy? In short – NO!
In life, you have three resources:
Renovating a property takes up a considerable amount of all three. Do you have enough to do what it takes to succeed? For most people, I would say no.
Reality TV Isn’t Real
On TV, renovation looks fun and a bit sexy, right? You see these people frolicking around with tools, couples having paint fights, and getting to pick out their favourite coloured subway tiles for the kitchen splashbacks and perfectly matched décor for the bedrooms. In reality, though, it’s not like that at all. What you don’t see behind the scenes is the army of tradies that are helping them (and doing the bulk of the work!), and you often forget that these people have taken time off work to be on TV.
The ACTUAL Realities of Renovating
For everyday people, here’s what renovating a property really looks like:
- You go to your day job
- You finish work, but you don’t go straight home to relax because tonight you have to paint that wall…
- On your way home, you pop into Bunning and buy a whole heap of stuff
- You throw the receipts on the floor of the car because you’re just too caught up in the action to track the true cost of your renovation
- You run out of time (and mental energy) to plan and prep dinner, so you go to KFC drive thru on your way home and stuff your face while you drive. After all, your kitchen is half torn apart with the renovation and you just don’t have time because you really need to get that wall started.
- You get home and start painting
- Stopping just doesn’t seem like an option so you keep going until you’re finally finished at 1am
- You collapse on the paint-covered couch, only to be woken 4 hours later by your phone battery dying because you forgot to plug it in
- You get up, shower, and go to work
- Then you repeat the whole process again the next day because, as luck will have it, your house actually has another 10 walls that need painting
As it turns out, this renovation that you thought might take around 3 months is now coming up on 3 years. Does that match up with your renovation dream? Does that sound romantic to you? Does that even sound feasible with your current level of energy, resilience, and finances? Probably not.
Let’s not forget that most people also have a partner relying on them, expecting them to spend time together. Chances are, your wife is just about ready to pack her bags and go at this point… or if you’re the wife, you’re about ready to leave your husband!
What’s the True Time and Cost of Renovation?
Before you jump on the renovation train, let me urge you to do the numbers.
Firstly, work out how much time it will really take you to do that renovation. Include the time you’d spend finding the property, setting up the finances, getting the purchase finalised, cleaning, demolishing, purchasing, decision making, actually renovating the rooms/exterior, fixing broken stuff, getting it ready to sell, finalising the sale… etc. How many months or years of your spare time is it going to take up? How many hours does that work out to be?
Now, work out how much money you’ll need to put into it during the purchase, renovation, and then selling it. Include stamp duty, legal fees, all of the big/small Bunnings purchases you’d need to make along the way, marketing costs, agent’s commission, and capital gains tax. And after all of that, what’s your profit? How much money are you actually likely to get once you sell it?
Finally, work out what you’d have to pay yourself if you were earning a wage for the time you spent on that renovation. You’re probably earning $40 an hour in your day job. If you divide the profit you’d make on the renovation by the time you’d need to put into it, you’ll most likely be earning closer to $3 an hour. Is that really worth it?
Here’s the hard truth: you lack the skills, the time, and the money to make it out the other end and still have a worthwhile investment.
Who Can Successfully Renovate?
There are only two specific types of people with the skills to succeed with a renovation strategy, as long as they also have the time and money. If you lack these skills, it’s best to steer clear.
Tradies who have the relevant skills to complete or manage a large portion of the renovation can sometimes make it work, if they have the time. This is because they can work efficiently and often have mates who are tradies who they can call on for help.
2. Project Managers
People who are good at managing projects and have a good understanding of what’s required can potentially hire and manage the tradies needed to get the work done efficiently.
If you fall into either of those groups and have the time, skills, and money to do a renovation, it might work for you. It might not be the best strategy, but you also might not do too badly. For everyone else, renovation is only going to cost you time and money you don’t have because you’re slow and unskilled.
How do I know all of this? I tried it myself in my early property investment endeavours. I know firsthand what can go wrong and how much it eats into your time and money. I’ve seen family and friends make the same mistakes time and time again.
Please don’t let that be you too.
Daimien J Patterson
Daimien Patterson is the CEO of Integrity Investment Properties, a property investment company based in Australia. He regularly produces books, blogs, and videos on the topic of property investing. Head to [integrityinvestmentproperties.com.au] for your free copy of Daimien’s book, Safe as Houses.