{"id":369,"date":"2021-04-05T01:44:55","date_gmt":"2021-04-05T01:44:55","guid":{"rendered":"https:\/\/wordpress-655153-2137993.cloudwaysapps.com\/?p=369"},"modified":"2021-04-05T01:44:55","modified_gmt":"2021-04-05T01:44:55","slug":"msfire19","status":"publish","type":"post","link":"https:\/\/msfiremama.com\/msfire19\/","title":{"rendered":"Renovations Part 1: Determining Your Budget and Scope"},"content":{"rendered":"\n
Renovating a property probably causes the most anxiety when investing in real estate. A lot rides on the results: will the changes maximize rent, minimize maintenance and draw a quality tenant? <\/p>\n\n\n\n
Many things can go sideways as the best way to make money on a property is to force appreciation. Generally, that means finding a run down house or building that has a lot of unknowns that may only be revealed once you\u2019ve opened a wall (mold, electrical or plumbing not up to code, etc) or done significant demolition.<\/p>\n\n\n\n
On top of that, you want to make sure you\u2019re not overpaying for renovations or spending too much on finishes that don\u2019t actually add value. These situations are much easier to navigate and mitigate than unknown issues in a property.<\/p>\n\n\n\n
This is the first post outlining the process of determining your renovation scope and budget for the project. The second will talk about the bidding and contracting process. The last will discuss managing the renovation and payment process.<\/p>\n\n\n\n
Know your Parameters<\/strong><\/p>\n\n\n\n In order to know how much you should spend on a renovation, the very first piece is figuring out what your investment goals are. A lot of numbers go into a deal analysis and free calculators<\/a> exist to help compute deals, determine your mortgage and figure out what your rent range is going to be. <\/p>\n\n\n\n This post will not touch on what makes a good deal, but how the deal analysis<\/a> can tell you what you\u2019re able to spend on the project and still make money. You have to decide which metric <\/a>will be the one that is your make or break. Will it be cash-on-cash return<\/a>? Capitalization Rate<\/a>? Return on investment (ROI)<\/a>? <\/p>\n\n\n\n Then you can plug in the cost of a potential renovation to know what the limit will be so you can maintain the profit you are looking for, or see how flexible you are willing to be with the level of profit you wish to attain.<\/p>\n\n\n\n For example, say you are looking at property that is expected to cost $50,000 (closing costs, agent fees etc. included). Your metric of choice is COC return with a target of a minimum of 10 percent.\u00a0<\/p>\n\n\n\n COC = Annual Pre-Tax Cashflow\/Money Invested<\/span><\/strong><\/p>\n\n\n\n To keep things simple, let\u2019s say your analysis indicates that the property will cash flow $7,500 annually. This would mean that the $50,000 purchase price would leave you about $25,000 for a renovation budget. That is the maximum amount you could spend to still meet your 10 percent COC target.<\/p>\n\n\n\n This $25,000 is a number you keep close to the vest and do not share it with any contractors that you ask to walk the property or for bids. The goal is to maximize your COC and you will be able to if you can find a way to spend the least amount of money on renovations to generate the maximum rents and minimize your future maintenance.<\/p>\n\n\n\n Know your Comps<\/strong><\/p>\n\n\n\n