Your Investment Home: Don’t Lose Money On Over Improvement
With so much economic uncertainty along with a significant shift to the outsourcing of labor, fixing up homes for resale has become a popular option for beginning a small business. Whether you make a profit on the resale of a home depends largely on the asking price, how much you spend to fix it up, and the market value of the house after completion.
Most homes that are fixed up and resold can be done so for a decent profit. However, there are some homes that are simply “over improved.” Ironically, excessive renovations can actually decrease your profit, or even end up costing you money in the long run.
Profitability After Improvements
Before even buying a home, you need to give detailed consideration to what the home can be sold for after the improvements. This will provide you a good idea of what your budget investment should be for the improvements, and help you estimate your potential profit after resale.
You must become knowledgeable about this because many overly optimistic investors blinded by dollar signs wind up over estimating the value of what a home could be worth.
Your best bet is to inquire with a knowledgeable real estate agent who can provide you at least general information about selling prices for homes in the area.
Improving Homes to Comparable Standards
They will also be able to recommend improvements you can do on the property to make the home comparable to others in the neighborhood. Conventional wisdom is that you should avoid having your renovated home becoming either the worst or best house on the block.
Most improvements, besides kitchens and bathrooms, only return a fraction of the cost you put into them. Even improvements in kitchens and bathrooms, the two most important rooms in a house, only raise the value of the home up to a certain amount, regardless of any luxurious amenities you build.
Bluntly, even before you do the improvements, your home’s “ceiling value” (that is, the highest amount for which you can realistically resell) is already established by the homes around it.
For example, if you purchase a home for $100,000 and the housing market indicates that similar homes nearby are going for approximately $200,000, you probably won’t be able to sell it for any more than that higher amount, regardless of the impressive improvements you put into it.
Don’t Overdo It
By limiting renovations to the work actually needed on the real estate, you can increase your profit by developing its value toward the $200,000 price range without going overboard.
Essentially, your financial goal should be to receive roughly $2.00 back for every $1.00 you spend on renovations. You can accomplish this by developing the quality of the house up to par with that which typical buyers in the area actually need and want, rather than over developing.