FUNDAMENTALS
PROFITABILITY
Talking Loudly: A Path to Higher Profits
BUILDING THE RIGHT RENOVATION STRATEGY
By Nathan Trunfio
he process sounds simple. Purchase an undervalued property. Renovate the home. Then, sell or rent for a solid profit. However, there’s a lot of work involved to successfully cross that finish line. For value-add real estate investment projects, you must define the proper levels of renovation, identify the ROI sweet spot, and then skillfully execute the plan. While the design and aesthetics of your renovation are often considered the sexy part of the process, the return-on-investment boils down to your project and budget numbers. After all, having a renovation budget and plan that’s misallocated may leave your investment in the negative. Designing an effective renovation strategy will ensure your value-add projects are a successful investment. THEVALUE OF DESIGN IN REAL ESTATE INVESTING How do you determine the necessary renovations to truly wow people? I recommend making decisions based on your exit strategy. Doing so will give you direction when creating your renovation plans and T
scope of work. If you plan to sell, be aware of your price point. Your repairs should align with the market in which you are operating. For example, a home on the higher end of its market will require high-quality finishes. If you plan to rent, think of quality but also be economical. Since tenants will cause wear and tear, you want durable materials. For instance, hardwood flooring may cost more than carpeting upfront, but it will be more cost-effective long term due to the lower cost of maintenance. Additionally, when deciding what design enhancements to make, ask yourself these three questions:
However, this comes at an average cost of $9,254 and only increases the resale value by $4,930. If the sole purpose of upgrading the entry is better aesthetics, this renovation is not an optimal choice. Other expensive upgrades, such as a mid- range master suite addition and major bath remodel, don’t provide great returns either. 2 How much “fix” do I need to get the best “flip”? To identify your project’s proper renovation strategy, you need to focus on your “return on costs.” First, calculate the property’s after-repair-value (ARV) by examining comparable sales in the area. Then, identify what type of renovations you will need and how much they will cost. Once you have calculated the total cost of renovations, determine if you are getting a good return on the investment. Do this by comparing your budget to the difference between your cost basis (purchase price + renovation amount) and your ARV. Keep in mind you cannot massage the budget to make the numbers work. But, you can make sure your
Will this renovation improve the project’s ROI?
1
Most often, inexpensive yet highly visible repairs and updates effectively boost resale value. And certain expensive repairs can cost more than what you will recoup at the sale or over time in rents. For example, constructing a grand entrance by enlarging the space and upgrading the front door may enhance a home’s curb appeal.
56 | think realty magazine :: july 2020
Made with FlippingBook Online newsletter