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Renovating a Property as an Investment Strategy
If you are in the market for an alternative investment strategy you could consider the of a home or property. Renovating to sell, rent, lease or revalue is one of the most common reasons that an individual investor, or even a group of investors, purchases a fixer upper.
There are some ways to enhance profit potential in such a strategy, yet it is not wise to skimp on any areas where professional assistance or investment services might be required. The first thing to consider is curb appeal. Do not apply your own preferences to the home or building, but instead look at it with a buyer’s, renter’s or banker’s eye. If you can see the potential for appeal, the property may be a reasonably good investment tool.
Next, as a potential buyer you should make a thorough tour of the building and itemize all areas in need of improvement. It is only in this way that you can see if a realistic budget and profit margin exist. For example, if an entire building is in need of complete and upgrading it may require far more capital than can be realized through a resale or even long-term rental or leasing arrangement.
If the amount of work seems reasonable, however, take this list and work either with a professional contractor or assortment of building professionals to establish a realistic quote for every part of the project. It is only with such a document in hand that a bank or lending agency will consider the project.
Of course, if you are not looking to renovate to sell, but to improve your equity in a property, you should be considering the “80/20 rule”. This is a plan for investing twenty percent of the capital available into one area in order to get an eighty percent return. For example, most professionals recommend focusing on kitchens and bathrooms when hoping to hit the 80/20 rule.
How does this work? Let’s say you are a homeowner looking to improve the equity value of their home. You invest fifty thousand dollars in a project on the interior of the property. You use roughly ten thousand dollars in the bathroom, outfitting it with all new fixtures, plumbing, lights and other accoutrements. Once the project is completed you are going to want to see that the bathroom work has increased the value of the home by roughly eight thousand dollars. This is not a loss because overall equity has increased and you gained a net value increase of eighty percent of the investment.