How much should you pay for a reno property?

One of the hardest things to know when buying property is: what exactly is fair market price? Especially in hot markets like Melbourne and Sydney, where desperate buyers and cashed up investors fork out eye-watering sums for properties they probably wouldn’t have given a second glance five years ago.

Front of house – before

If you’re buying a property as a home, then maybe there’s a permissible margin for the, “I just love this” factor. But when you’re buying a property you plan to renovate and sell for a profit, there’s no room for emotion; it’s all about the facts and the figures.

And the key figures you need to be reasonably assured of in order to make that profit is:

• How much the renovation is going to cost (see some of my indicators that you might be about to overcapitalise here)
• What the property is going to sell for post-renovation
• The price you need to buy that property for in order for the numbers to stack up.

So in a sense, you’re working backwards, with the forecast sale price as your starting point. And how do you predict that elusive figure? Research, my friend, and lots of it. It’s what I call “due diligence” in my renovation workshops.

How to do your ‘due diligence’ on your reno property

Front of house – after

There are many aspects to this due diligence, but essentially you’re studying market conditions in forensic detail in order to sift out the suburbs – and the types of properties in those suburbs – that offer the most profitable renovating prospects. For example, you need to establish pricing disparity between renovated and un-renovated versions of the same type of property. If you find there’s very little price difference between the nicely renovated terrace and the rundown one in the same street, then clearly you’re unlikely to turn a profit. Move on.

Become a property expert in your target suburb: best and worst streets, new developments, local infrastructure, council restrictions on what kind of renovations you can and can’t do, etc.

Study past and current market conditions to establish there’s been decent capital growth in that suburb, and that the growth is likely to continue. There’s usually a knock-on effect when a popular suburb gets too pricey; the ugly stepsister next door suddenly looks a whole lot more attractive.

These are just some of the pieces of the puzzle. Clearly, there’s a whole raft of issues and costs to weigh up when you’re talking about one of the biggest investments you’re likely to make. But whatever you do, don’t just trust your gut!

Pore over the figures, put in the research and get a really accurate handle on what properties are selling for in your target suburb – only then can you be reasonably confident of what that rough diamond is really worth.

Cherie’s next 3-day renovating workshop in Sydney is May 19. See details for the workshop here

Cherie Barber is the director of Renovating for Profit, a company that teaches everyday people how to buy and renovate properties for a profit.