In my design practice most renovations fall under one of four overall categories. The approach in how to select the property and plan the renovation is quite different for each. Knowing before you begin looking, what you hope to accomplish at completion, will set you up for a successful purchase and renovation.
The four most common renovations I encounter are 1. Income Properties, where we create legal accessories apartments, duplex or triplex units, 2. Force Equity renovation, where they buy and renovate with the intention of keeping the property long term. The idea being to reappraise the property, post renovation, allowing that new equity to fund the next property purchase. 3. Five year flip, typical of a first time homeowner or budding investor, this approach is to complete a cosmetic update with the intent of selling within a few years for a profit. The last renovation type is 4. Dream Home Renovation where it’s about creating the ideal home knowing upgrades will more luxury spends can be recouped long-term.
How to shop for the right property
- Income Property
Location: Accessible to transit and close to viable rental pool like universities, trades schools and hospitals will ensure you never have vacant units.
Price point: positive cash flow of 1k/month. That means all the expenses and maintenance is 1k less than the combined monthly rental income. This sweet spot of cash flow allows a good buffer should unforeseen vacancies or maintenance arise.
Physical Condition: Ability to meet legal requirements; Fire & sound, parking, ceiling heights, egress, laundry, light allowance and separate entrances are all paramount and necessary before you commit to a property purchase.
Hint: Your local permit office can provide you with the municipal requirements and legal status of a property before you purchase.
2. Force Equity
Buy low, renovate to add equity, keep the property long term and use the new forced equity to buy your next property. Simple, right?! This approach has built a healthy portfolio of properties for many real estate investors. The success is tied to a low interest rate so be sure to now overextend yourself should the rates spike over the coming years.
Location: Up and coming which allow syou to buy low and wait for the increase over time.
Price Point: Fixer Upper. Affordable house on a good street
Physical Condition: May need a major renovation however because you’re keeping it long-term you can afford to take on a larger renovation.
3. Five Year Flip – Cosmetic reno
Buy low, but safe. Look for streets that have a good range in values already. Let others test the waters then follow their lead by buying on the low end and renovating to push it to the top of the pack.
Location: ugly house in established neighborhood to keep the risk lower
Price Point: bottom of range in area with a history of some properties selling higher.
Physical Condition: Look for a smaller renovation, more cosmetic to keep the surprise expenses at a minimum.
4. Dream Home
Location: Buy into the neighborhood and create the house you want
Price Point: Invest with the intent to stay with a long-term plan, allowing the renovation investment to reflect the longer amortization period.
Physical Condition: Relative to your overall budget for combined purchase and renovation.
Whatever your real estate endeavors, the key to success is defining your goals in advance and staying focused.
About the author: Jo Alcorn is a design specialist and designer. She has her own furniture collection, signature pillow and dog bed line and is known for her savvy design concepts.