You may be looking to renovate a property for personal use taking advantage of the potential increase in equity or so that you can sell it on, and make a profit. In either case, you will want to have increased the value of the property after your hard work, blood, sweat and tears – believe me there will likely be a decent dose of all of them. Today, the team at Houso would like to offer you a few tips on how to renovate a property so that it will facilitate a nice profit margin after your home’s renovation.
- Step 1. Identify the geographic area you want to specialise in, do your research look at sold prices not asking prices, as a developer we work on something called £ per sqft to help ascertain an asking price, do the maths when analysing what has sold prior to establish a £psf of the local area, be critical and honest of any attributes that the houses had, that you may not be able to provide. To calculate the £psf of a property – Asking price or better sale price / sqft (some particulars will show the property measurements in Sqm, this is the same calculation however it will be a significantly higher rate as there are 10.77 Sqft to a SQm) 450,000/1250sqft = £360psf or £450,000/116M2 = £3,879 M2/10.77 =£360. The key to a successful project starts with the purchase price, if you over pay you are playing catch up from day 1. So get your finances in order so you are as proceedable as possible and bite the bullet. The same formula is applied to the build costs.
- Step 2. Find a property – a fixer upper or plot – these are rarer and rarer, and many agents have a fairly robust selection of developers who are looking for the same thing, they are often known to the agents and are proceedable in cash, so they offer a quick and attractive solution to the Vendors. If it is your first renovation, congratulations on taking the step to make a commitment to something, do your budgeting properly, take a builder along for the second viewing or someone who knows more than you, believe me when I say it is a fast learning curve. There will be problems so always have a 10-15% contingency for a rainy day, or leaky roof, or broken plumbing system. It just happens, be pro active and decisive and move on. Ensure you factor your professional fees into the equation, mortgage, Solicitors, Structural Engineers, Estate Agents (not with Houso of course) etc as these crop up at the end.
Establish whether it is a quick flip or whether there are more substantial works that might be possible to increase your ROI – check with the planning department and building control to see what is or isn’t possible under Permitted Development rights, some form of works will require planning, and this will take at least 8-12 weeks so that element needs to be factored into your mortgage payments.
As soon as you have an idea of what you are going to do be doing to the property list it on Houso as an OFF market property – if you can secure a buyer in advance with no agency fees you will be making your cash work for you to the very best of your ability, Subject to agreement they might be able to have some input into the properties finish and spec, which saves you having to take a risk on getting the spend/layout/aesthetics correct from the outset.
- Step 3 – Do the job properly, remember that someone will be buying this from you in good faith, and it is their biggest investment they will ever make, they deserve to live in a home that is fit for purpose and fulfils the expectations. It is not acceptable to do a poor renovation, charging an increased price for it, making profit only to leave the new owner with costly issues. Set up trade accounts with local builders merchants, ascertain the VAT implications of the build. A home that has been occupied in the past 3 years will attract a 20% VAT levy, a home that has been vacant in excess of 3 years will be 5% VAT and a building that is being converted into a home for the first time is VAT exempt. Employ well respected sub contractors that you can build a relationship with.
Commit your ideas to paper, even if this is a hand drawn scaled drawing of the house, or room by room with annotations, and if you are able to extend the property ensure these works are approved by building control, and potentially employ a draftsman to give you proper plans that can be followed. This ensures your trades can be productive in your absence when you have to pop to the merchants, or if you appoint one contractor for them to price from.
Try to get as many of your contractors on a fixed price. You could potentially save money by supplying products, although in the early stages it is likely that your contractors will have better relationships and terms with the local suppliers. Shop around, and if you can get the price less than your trade is suggesting offer them the chance to match it, remember that a lot of stuff comes with warranty issues, so if the contractor supplies and fits for the same price that you would be paying by breaking the package down – take the supply and fit option! then when issues arise you will be able to instruct the contractor to remedy the situation under his warranty. If you supplied a product and the contractor installed it then there is the grey area of who is responsible, which will ultimately be you.
- Step 4 – Finish it properly, paint it in a neutral inoffensive colour that enables the owner to add their taste, many paint companies offer a colour match service which gives a larger range of colours than Magnolia and Brilliant white. Clean it so it sparkles and be proud of your work. VAT is applied on carpets and kitchen appliances and there is no reclaim possibility on this, but they really are the finishing touches so it’s worth going that extra mile as they will complete your endeavours. Use a decent underlay as this is instantly recognisable when people view with their shoes off. If you renovated a flat, check the terms of your Leasehold as often wooden or hard floors are not acceptable as the sound transfer is so poor. Employ a mastic contractor once it is clean to silicone the window reveals and the bathroom and kitchen tiles, it just finishes the house off – it is a skill, one that can be done beautifully or one that can be bodged make sure the bead is 1.5-2mm max anything more than this and you haven’t installed the product properly. Make sure the garden is sorted and make the most of this area, presently it is one of the driving factors in new home searches so make sure it is shown off to the best of its ability.
- Step 5 – Sell or Stay – this entirely depends on the strategy you set out with. Get three local independent agents to value the property if you haven’t sold on Houso prior to listing and make your decision.
- Stay -You might have fallen in love with the property and want it as your new home. If you were to move into it for a period of time then in the future you would be able to sell it CGT (Capital Gains Tax) free which could be a nice saving currently 28% of the profit, check with your accountant as to the length of time HMRC require. You also might have overspent on it and when you had it valued you are not making any profit so you need to wait for a rise in the market. (I hope not)
- Let it out. Assuming you have made some profit you could use this as a way to remortgage releasing some equity, essentially you would leave an element or all of your profit on the table which would allow you to release the funds that would act as the deposit for the next one, this is a common financing strategy for professional landlords, but do bear in mind the downsides of a falling market, rising interest rates and a stagnation in the property, this is a complex form of leveraging and you need to understand the possibilities but more importantly the pitfalls prior to committing to this.
- Sell it, hopefully banking the profit and move onto the next one, more informed, a little less green and a lot more confident. CGT would be payable depending on your income etc.
Next week we will talk about structuring your finances to make sure you are purchasing it in the most efficient manner, once you have done one, you might have the bug and we can look at ltd companies and their benefits.
Good luck and any questions please ask.