You may be wondering, how you make your money at the purchase, since you actually do not get cash in your pocket until you sell. You do that by determining your overall budget, calculating your renovation costs and estimating your selling price.
Your budget, is the amount of money you can put into a renewal account monthly. This can always increase but should never decrease. In other words it should be money that you do not need to run the household on a monthly basis. Whatever your monthly contribution to the renovation is, times the number of months you estimate you will live in the house, will be your budget for the project.
Estimating renovation costs, for a purely cosmetic renovation, should be fairly easy to determine. Make a complete list of renovations by using a checklist and, if allowed, take lots of pictures. This list may take a couple of visits or more to compile. Do not rely on your memory, especially if you have seen a number of properties. Once you are satisfied that you have a complete list get estimates on all materials at full price. Estimating any renovation should always be done at the high end. If you are concerned that you have missed a major renovation or that you do not have enough experience to determine what exactly needs to be done you can always pay to have the property inspected. You will have the home inspected anyway as part of the agreement to purchase. This inspection should tell you if there are any major renovation expenses you have missed. You can then determine whether the purchase is worth the investment. I would rather loose the cost of a home inspection rather than paying for a major repair.
Never assume that you will get all materials on sale for your renovation, although that should be your goal. You will probably pay full price for a portion of them at least. There is a way to shop for deals and we will discuss this later. Once you have your list compiled add a minimum of ten percent to the total. You never know when materials may take a sudden jump in price. Go over your estimates a couple of times to make sure you have a good idea of renovation costs.
Determining what renovations needs to be done is another subject we will cover later, but you can ask your agent (yet another subject to discuss later) what would bring the house up to full market value today. He or she should be able to tell you what people are looking for in that area and recommend what renovations you should do.
Estimating what the house will be worth, after all renovations are complete, can also be determined by your agent. Tell them to give you an estimate on the completely renovated house in four years. They will be able to use the average market appreciation to determine this. I would stay low on this estimate. For example if your agent tells you that the average appreciation for homes in that area is six percent per year, use five percent or even four percent to calculate the estimated market value. Many things can affect the, rise or fall, of real estate values.
Once you have all of the numbers crunched you should be able to determine whether you will make the extra profit you are looking for. Where you make your money is in the difference between your budget, what you spend on renovations, and the top market value of the house today, if all renovations were completed. For example if you purchase the house for two hundred thousand and plan on spending twelve thousand on renovations, and the top market value of that same completely renovated house in today's market is two hundred and twenty four thousand, then you have just made, in theory , twelve thousand dollars, plus the appreciation on two hundred and twenty four thousand over the time you keep the house, plus the amount paid on the principle of your mortgage. After three years, using a five percentage appreciation value, the house would be worth an estimated two hundred and sixty thousand. On the other hand if you bought the house for two hundred thousand and did nothing to it, the value would be about twelve thousand dollars less, not to mention the increased difficulty of selling the property.