Weighing pros and cons of renovating

many investors who have serious interests in putting their money in real estate business.
The aim essentially is to realise a substantial return on the investment that makes the process of either building or renovating worthwhile. In this article, I am going to focus on what to consider when choosing the option of renovating.
As with all property investment location is the decisive factor when making a decision to purchase. Most commercially viable areas in our country, in terms of property sales are already built up neighbourhoods with zonal values acquired over time.
As a result, it is not always easy to locate vacant land in such areas because of demand and the most plausible option is to identify a property that can be remodelled or renovated to give it a higher price in case of a resale..
The option of renovation must not be approached blindly as in some cases it can end up being more costly than building on a vacant stand.
The fact that a building, however dilapidated, is situated on a piece of land that has the potential of significantly increasing the price when compared to what it will be had the land been vacant, is a very good motivation.
The amount of renovation that the property requires must be critically assessed. Minor renovations that tackle specific and identifiable problems in an otherwise functional home are generally the most cost-effective option.
The downside to properties that need minor renovations is that it makes it harder to negotiate for a substantially lower price.
The common trend is that such properties will be just below the area average and most lowball sales of such properties are a result of the seller’s personal circumstances than the purchaser’s negotiating advantage.
The properties that actually possess a negotiating advantage in buying because of their need for renovations are not always clear-cut with regards to their ability to return substantially on investment input.
This is because the renovating process ends up growing beyond the original and anticipated scope of work, due to reasons brought to light by renovations.
As these faults are unforeseen, they can be varied in scope and extent. In one scenario, it could mean a total change of the drainage system and in another, a rewiring of the electrical system because of potential dangerous faults realised during renovations.
There are stories of renovations that have started as just repairing of walls and before long nearly the whole house is under renovation.
Building a new structure has its own pitfalls but finding rots, water damage and termite attack is not one of them.
Whatever the extra need for renovating might be, it has the potential of significantly increasing value of total investment while not adding markedly the value of return on investment.
In the end, after calculating the cumulative cost, an extensive renovation to an older home might end up costing more than building new. There comes a point where renovating can become a liability. In working out the costs, it is imperative that one is not just attracted by initial purchase cost.
One has to consider approximate renovation costs and since the area exists either as residential or commercial property and the average selling cost of a remodelled property.
A ceiling should be logically set for the total amount available for renovations.
Included in the amount must be a provision for unforeseen faults. Then all costs associated with the increase in value or size of the property must be noted, this will include any city council applications or penalties.
Then the possible minimum resale value calculated at the beginning of the project, including capital gains tax or any other tax that may be applicable.
Investors normally omit in their planning, the fact that an increased selling price after remodelling has capital gains tax implications.
After all calculations one then works out if the renovation option is ideal for the property. Building new has a tendency to be long and tedious while also having unforeseen costs.
If one intends to buy for a quick resale after adding value then looking for properties that need renovation is the best option.
For the unseasoned eye, when it comes to investment properties, it is best to find a real estate agent that can navigate with you in your search and best advice on which route to take, be it renovating or building new.
l Vengai Madzima is a property consultant and analyst with Wisdom Properties. He can be contacted on 0772 468093 email: [email protected]