“To prevent cost blowouts during a renovation, it is important to have a clear plan from the beginning.”
Is there a formula to easily calculate the profitability of a renovation?
The short answer is yes (which I’ll come to in a second).
But the long answer is not really…
Because there are a number of key variables that you need to factor in when doing a detailed costing on a renovation.
On top of this, every investor is different in terms of their financial situation, ultimate goals and strategy.
However, after working with thousands of investors who’ve completed hundreds of successful strategic renovations…
I can share are a couple of golden rules to help you get started.
My general formula to costing a cosmetic renovation is:
The purchase price x 140% = the minimum resale price or revaluation figure you need after renovation to be profitable.
So let’s break that down…
🔸 Purchase Price: 100%
🔸 Acquisition costs: 6%
🔸 Renovation costs: 10%
🔸 Holding costs (depending on time and rate): 5%
🔸 Selling or refinance costs: 04%
🔸 Profit margin: 15%
So the total value of the property (100% of the purchase price) plus 40% in costs to purchase, hold, renovate and make a profit equals 140%.
Which means the property (after completing the cosmetic renovation) should be valued at a minimum of 140% to be feasible.
Let’s apply this to a real life scenario.
Say you’re looking at a house with renovation potential that has a purchase price of $400,000.
If you complete a cosmetic renovation on the property, it needs to be revalued or sell for at least $560,000.
(Purchase price of $400,000 x 140% = $560,000)
Let’s break it down:
🔸 Purchase Price (100%): $400,000
🔸 Acquisition costs (6%): $24,000
🔸 Renovation costs (10%): $40,000
🔸 Holding costs (5%): $20,000
🔸 Selling or refinance costs (4%): $16,000
🔸 Profit margin (15%): $60,000
Resale or revaluation price should be $560,000.
You can use this formula in reverse to help figure out the purchase price. You simply start at the resale or revaluation price and divide that by 140% to get the maximum amount you’ll pay for the property.
Resale or revaluation price divided by 140% = purchase price
For example:
$560,000 ÷ 140% = $400,000
Let’s say you want to change the actual structure of a property.
As a general rule, a structural renovation shouldn’t cost more than 40% of the purchase price.
To calculate if a structural renovation will be profitable, here’s my formula:
The purchase price x 180% = the minimum resale price or revaluation figure you need after renovation to be profitable.
Broken down, it looks like this:
🔸 Purchase Price: 100%
🔸 Acquisition costs: 6%
🔸 Renovation costs: 40%
🔸 Holding costs (depending on time and rate): 8%
🔸 Selling or refinance costs: 6%
🔸 Profit margin: 20%
This time, the total value of the property (100% of the purchase price) plus 80% in costs to purchase, hold, renovate and make a profit equals 180%.
This means the property (after completing the structural renovation) should be valued at a minimum of 180% to be feasible.
Let’s apply this formula to a property with a purchase price of $400,000.
After completing the structural renovation, the property’s resale or revaluation price should be at least $720,000 to be profitable.
(Purchase price of $400,000 x 180% = $720,000)
Here’s what that looks like:
🔸 Purchase Price (100%): $400,000
🔸 Acquisition costs (6%): $24,000
🔸 Renovation costs (40%): $160,000
🔸 Holding costs (8%): $32,000
🔸 Selling or refinance costs (6%): $24,000
🔸 Profit margin (20%): $80,000
Resale or revaluation price should be $720,000.
Always remember, the ultimate goal of any investor when costing their renovation is to know how much they need to spend to make money. If you don’t make at least $2 for every $1 you spend, it’s not a successful strategic renovation.
Whenever you’re ready… here are 3 ways I can help you right now:
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