Are you looking to maximise the Return on Investment (ROI) on your property investments?
Is the cost of refurbishment an important factor when calculating your ROI?
Have you have answered yes? Then this article is for you.
Many of my clients (and indeed myself) in the past have spent more money on refurbishing a property than needed to. This then has an adverse impact on the profitability of the investment made in a property.
Example: a house costs £80,000. It requires a 25% deposit, which is £20,000. If the legal fees and other professional fees equate to £2,000, them the total spend is £22,000. Let us assume that the net profit per year is £3,000.
If you spend £10,000 on the refurbishment of the property then the total amount spent on the property is now £32,000. The ROI is calculated as 9.4% (£3,000 divided by £32,000 times 100).
Imagine however that the refurbishment project was not managed properly with suppliers and the cost increased to £13,500. The total amount spent on the property increase to £35,500 and the ROI would therefore drop to 8.5%.
Why might supplier costs be more than expected?
– The specification given to tradesperson might not be right or complete
– Materials may be damaged or incorrect and may insure a re-stocking fee
– There may be required works not known at the time. For example a tradesperson may uncover damaged walls when wall paper is removed or damp when tiles are removed.
This decrease in ROI does not sound a lot but sometimes the increase in cost could have been avoided.
There are many ways tips that will help you manage the cost of your project.
– Quotes: obtain 2-3 quotes for any work that is more than £1,000. This will give you a good bench mark and comparison.
– Specification: ensure that the specification’s that have been drawn up have been agreed with the tradesperson up front. You need to ensure that you know enough detail so that surprises are minimised.
– Referrals: there are rogue trades people out there. Ensure that the people you used have references or you have been referred to them. Even if they have been referred make sure that you meet with them and discuss your needs at length. You need to build up your trust rather than assume that they are going to do a good job for you
– Contingency Costs: always allow a minimum of 20% contingency costs in your project. If there are a lot of unknowns in the project then this should be increased to at least 50%.
The last factor is crucial. I recall one project that should have been £120k but ended up being £150k, a £30k increase because there was issues with the specification and hidden issues that required a lot more work. As you can see, this was a cost increase of 25%. That said we still achieved a ROI of 150%+ because we factored into account a contingency cost of 40%.
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