The Importance of Conservative Renovation Budgeting
Whether you are a real estate investor or a homeowner looking to renovate your house, it is extremely important that you set a realistic budget and timeline. If not, you can find yourself in the prototypical “money pit” situation. By having a budget in place, you can keep your process more focused and avoid overspending.
Renovating for Profit
We’d like to talk primarily to real estate investors in this particular article. You are running a business, and renovation budgeting is crucial to success. You should have a general budget already laid out long before you start searching for properties to buy and renovate. You should also know your investment plan, whether you are a “buy and hold” investor looking to rent out the property or a “fix and flip” buyer who is planning to resell the property as soon as your renovation is complete.
Your budget should cover the purchase price of the property, as well as renovation costs. You should already have a general budget laid out before your house search. However, then you will want to run detailed analytics and a project-specific budget for each house you are considering purchasing. Investing in real estate (especially when home renovation is involved) is never a “one size fits all” prospect. Each property needs to be carefully analyzed. Each budget needs to be customized to help you know how much time and money it will cost you to get the house ready for rental or resale.
Project-Specific Renovation Budgeting
If you are going into an investment property purchase with only a general budget in mind, you may be doomed from the start. Take the time to do your research and crunch the numbers. Make sure it is a worthwhile investment. Figure out if you will be able to make enough money once you have added up all the expenses of purchasing the house, making renovations and marketing it for sale/rent. If you are flipping the house, run market-accurate projections to determine the potential resale value. If you are renting, determine your ideal rent prices and study the market’s vacancy rates that could hurt your profitability.
Conservative Planning. Conservative Budgeting.
The other important recommendation is to be conservative in your estimates. When budgeting your renovation, you have to build in some “wiggle room.” Make space for unexpected costs and time delays. Very rarely does any home renovation go exactly as planned. There are almost always some surprises once you dig into the property. Construction delays and extra expenses tend to pop up no matter how carefully you plan. Set your expectations properly when creating your budget and project timeline.
If you don’t encounter any costly surprises or delays, then you will come in under budget and ahead of schedule. That’s great. If you only plan for the best-case scenario and build your budget too tight, then any complications will only eat into your profitability.
The same goes for setting rent prices or projecting resale value. Be conservative in your estimates and expect the lower end of your price range. Your purchase and renovation budget should still leave plenty of meat on the bone for profit, even if you ultimately get the lower end of your projected value. Again, if the numbers are too tight, you will have little-to-no room for error and it could be a recipe for disaster. Don’t go in expecting to come in under budget and get top dollar for the property. Set conservative expectations and budget accordingly.
These are just a few things to keep in mind when setting your renovation budget, timeline and overall project expectations.
For help with your property analytics and access to extensive home search tools, consider joining the PropertyLark real estate investment network. Learn more and apply on any of our buyer pages.