“How much profit should I make on a renovation?” was the question from a friend of mine who owned a single detached home and another townhouse property they rented. She was telling me that her husband doesn’t know which end of a hammer to use. As a result, they always had to pay someone to do minor repairs around the house and the rental property. She wanted to know what tips I could provide her to maximize the value of her repairs or renovations.
One thing is certain, once you own an investment property, there will be renovations and repairs. The extent of those repairs, renovations, or full-on construction will depend on the property, the project, and the intent. Here’s some of the best tips learned from the trenches about increasing/maximizing your profits. The profits described herein are calculated based on the property’s value, or your added equity position, not the capital injected in the property or renos. If you bought a property for $100,000, added $10,000 in renos, and you aimed for a 20% equity profit, your after repair value should be $132,000 ($22,000 in profit over $110,000 cost).
Top 10 Renovation Tips!
- How much profit/equity should you budget for a renovation or construction project on your investment property, or your home? We look for and recommend to take on projects, only if they have roughly 20% profit (or added equity) after all the costs have been incurred. More specifically:
- Personal home reno: 10%-20% profit margin. Your home is where you live every day, so it’s not all about the money.
- Cosmetic reno on buy & hold or flip: 15%-25% profit margins after the reno is done.
- Infill Development (house): 20%-25% profit margin after the project is done.
- Infill Development (rental project): 20%-30% profit margin after the project is done.
- Finish It Up. If you’re renovating a space, always complete the entire renovation of that space. It will add near 0% value unless it’s 100% complete. Decide to renovate the entirety or nothing at all of a space.
- You’re Overpaying! It may be convenient to buy everything at Home Depot, Rona, Lowes, but I can assure you, you’re paying more. Find less expensive materials here:
- Electrical: Go to Nedco for most electrical needs.
- Flooring: Depends on sales, but often end up at Cash & Carry Carpet Center, End of The Roll.
- Trims & doors: Instant savings! Go to Classic Wood Moulding or Canada Trim. For big orders they even do the measurements themselves!
- Paint: Too many to list. Google “paint supplier (your city)”. Always buy in a 5 gallon (2000 sqft coverage per coat). Buy contractor grade paint for a good mid-road price & quality. You should pay $20-$25/ gallon max (so around $100-$125 for 5 gallons), and less for primer.
- Granite/Quartz: Most people are paying wayyyyy too much for granite or quartz. For a flip or investment property, use quartz as it’s more impermeable to water/stains. You should pay $50 psf, down to $45 psf on large orders.
- Drywall: Reno Depot on the QC side is $0.28 per square foot. Home Depot varies around $0.40 psf. You can get the 12 ft long sheets to have less joints, to save time & material.
- Kitchens: We’re a big fan of IKEA for rental properties. They cost less, look good for a rental, and can easily find replacement parts if needed.
- Lumber: Grandor Lumber, Kott Lumber, Bytown Lumber are the places to go.
- Have a Budget! Even if you don’t know the costs for everything, put together a budget. This will help you keep track of cash. This becomes CRITICAL when doing a development project or new construction. Your client and the banks will want to see your budget.
- Labourer: If you’re doing over $150,000 in construction, you should budget to have a labourer on site every day. They cost $15-$20 per hour and will focus on cleanup and garbage, material transport, small jobs, picking up material at the store. The goal is to help your specialized trades focus exclusively on their work.
- Financing: If you want to take on bigger construction projects and potentially get a bigger payday, you will need specialized financing. You may need bridge financing, bank financing, or even private financing. Use a specialized mortgage broker, pay their fee if needed, and get the right type of financing to expedite your project and reduce your overall carrying time and cost.
- Design: For larger projects, a good third of profits are made or loss during the design stage. Space is not optimized, size of rooms, types of heating system, number of apartment designs, etc. Get a good design team to minimize your $cost / sqft, while maximizing your $price / sqft.
- Timing: Make sure to budget lost time and carrying costs, if you’re applying to the City for a building permit. The time you’ll need to allocate to do the actual work is:
- Allow 2-3 weeks of reno per apartment in a multi-unit apartment building.
- Allow 4-7 weeks for a whole house cosmetic reno. More time for a new layout.
- Allow 4-5 months for new construction below 3000 sqft (once you start digging)
- Allow 4-6 months for new construction above 3000 sqft (once you start digging).
- Allow 6-10 months from design, to building permit. Start your design before you own it!
- Trades: Always get 3 references, and see their work! Price doesn’t matter if their work isn’t good. Ask your network or even Facebook for recommendations.
- Cash Flow: If you’re doing a renovation, or a construction project, you’re spending lots of money. You need to have access to enough cash to complete your project. Make sure you have the cash and credit to hold on for longer then expected.
- BONUS! Your Sanity. Renovation and construction projects will test your sanity and ability to cope with stress and the unexpected. Construction and renovations are messy, stressful, and even chaotic. You don’t have to do it alone. Get a team to help you get to the end quickly.
If you have or are considering a large construction or renovation project, from new builds, to additions, to multi-family rental buildings, we can help. Contact us at: info@BuildingInvestments.ca or at 613-853-4833 for more info.
Happy Renovation!
Nick – Winner of the prestigious 2017 awards from the Real Estate Investment Network