Renovating a House: Where to Start
OK, so you have seen countless episodes of Homes Under The Hammer and have decided you want to buy a property to renovate and then rent out or maybe even sell. This is a great way to increase your wealth and start you on the road to becoming more financially sound.
But, as you often see on Homes Under The Hammer, if you buy the wrong property or don’t keep a lid on renovation costs you can come unstuck and not make any money at all, or maybe far less than you first thought.
Therefore it is vital that you chose the right property in the first place. Property purchase and renovation can have loads of potential pitfalls that you need to be aware of and minimize as far as you can. In this article, we go over where to start and things to watch out for.
The Value of Property To Create Wealth
According to the Sunday Times Rich List, 40% of people on that list created their wealth through property, and the remaining 60% invested in property as a means of growing and protecting the wealth that they previously created.
It is common and proven knowledge that investing in property is by far the most risk-averse, hands-off, and financially rewarding option to create both an income stream and to achieve capital growth.
With that being said, how do you become involved in property when mortgage regulations these days are much tighter following the financial crash of 2007/8? You may need to borrow money to get started in property. But that is not necessarily a bad thing, in fact, many successful property entrepreneurs explain that it is actually smart to use OPM (other people’s money), and also the great entrepreneur and American businessman Robert Kiyosaki said “there is good debt and bad debt”. Bad debt are things like credit cards and car payments that take money out of your pocket every month, whereas good debt puts money into your pocket every month. Good debt would be something like taking out an interest only buy to let mortgage on a property which you then rent out and receive more money per month than you have to pay out for the mortgage.
And what’s even smarter is when you can buy a property that needs a certain amount of improvement or renovation work to be done. This is because the renovation of property is another area which can make money as the improved property is then generally worth more than it was when you bought it, fetch a higher rent when you let it out, and it increases the value of the house usually far more than the cost of doing the renovation work in the first place!
This brings me to the next benefit of property, which is that over the medium to long term the value of all property only goes one way, and that is up! (this is called capital appreciation). Yes, there may be slight downturns along the way, but the fact is the value of the average UK property has TREBLED since the turn of the millennium – that is in the last 20 years.
So how do you get started with renovating property? Firstly you need to find a house. If you are looking for a property to renovate in the area you live in then it’s a good idea to visit your local estate agents. Your local estate agents will of course have details about properties for sale in your area, including properties that require renovation.
Another way is via our exclusive property renovation list that you can subscribe to. Each week you will receive our list that includes the latest bargain property renovation and modernisation projects, including below market value properties and properties up for auction.
These renovation opportunities include all price points and are arranged geographically to enable you to easily find properties in certain locations.
View the list here – Property Renovation List
Note: you don’t want to buy a property that has a big structural problem (something like subsidence) that is not apparent when you view the property but can lead to far greater expense in renovation costs than anticipated, and may even cause you to run out of money before you finish the renovation.
It is a good idea to pay for a full structural survey first so that you are aware of any problems with the property and are able to make informed decisions about where to spend your budget. These usually cost between £500 – £1500.
Secondly, you are going to need money to get started. Here is a breakdown of some expenses you can expect:
- Buying a property in the first place – when buying a property unless you are a cash buyer you will need to put down a deposit. Now typically this will be 25% of the buying price but can be as low as 5% especially if you’re a first-time buyer looking to move into the property.
- Cover the costs of buying – here we’re referring to solicitor fees, stamp duty, mortgage broker fees, etc etc. These fees can range from 3K to 5K depending on the actual cost of the property.
- Renovation work – this will vary depending on the amount of renovation work required.
TOP TIP – try to carry out some of the renovation work yourself to save money. Having said that you will need to call upon experienced tradesmen for the more specialist things such as electrical work and plumbing.
Finally, the renovation work doesn’t want to be too daunting. The reason being that to get a buy to let mortgage on a property that property will have to be in a relatively decent condition in the first place. That’s because to get a BTL (buy to let) mortgage the mortgage company will send a valuer to view the place before they agree to lend you money on it.
I think in reality the property you are looking to buy should be in a good enough condition (in the valuer’s opinion) to rent out as it is. Typically, at the moment, the mortgage company has to be sure that the rent you will achieve will be 125% of the monthly mortgage payment. We are talking about getting an “interest only” BTL mortgage as this will lead to the lowest possible monthly mortgage payment.
So a quick example:
Property cost: £60K
Deposit required: £15K
Therefore you are borrowing: £45K
Monthly mortgage payment (say 2.79% interest rate): £111 per month
125% x mortgage payment = £138.75 per month rent needed to satisfy the mortgage company
Expected rent: £350 per month
Therefore profit after mortgage payment = £239 per month (£350-£111)
So in order to satisfy the valuer and mortgage company you need to find a property that is not a total wreck! It needs to be in a rentable condition without much renovation work. Having said that though, there needs to be some way you can add value to the property which a) makes it more valuable as an asset and b) makes it more attractive to possible renters.
Relatively minor things which can make a huge difference would be things like decorating throughout, changing the kitchen, changing the bathroom, tidying up the garden, these are all things you can do yourself without having to employ costly tradesmen.
And also these things should not take you too long to do, after all, you need to rent the property out as soon as you can because you will be paying the mortgage from the start.
Now if you’re looking to flip the property meaning buy and sell the rules are slightly different because you won’t be looking to rent the property out. Your goal is purely to add as much value to the property as possible in a short space of time to then go on and sell it for a profit.
So a quick example of how that would look:
Property cost: £60K
Deposit required: £15K
Therefore you are borrowing: £45K
Renovation costs: £5K
Expected sell price: £90K
Therefore profit after flipping the property = £10K
Buy to sell has the potential to make large short-term returns if you can add value to the property with renovations and capital growth. You also don’t have to deal with tenants and rental property management duties. However, this is a very practical method of property investing, requiring time and expertise to succeed. There is also a chance you could lose money if not done correctly and it can be costly depending on the level of renovation work needed to increase property value.
We hope now you have a better understanding of what is required and the general costs involved when renovating property. Also, things to be aware of and how to minimize risk as much as possible.
What area of property renovation do you find difficult and struggle with? Let us know in the comments below.