Every great project starts with a great plan and includes a realistic, detailed budget. Compiling a thorough budget can be quite an undertaking, but it’s essential for a decent return on your investment property renovations. Before you begin your next project, check out these five budgeting basics:
1. Understand the potential value of the property
One of the biggest mistakes an investor can make is over-investing in a property. Ideally, you don’t want to spend more on the property than the expected increase in value as a result of the work. To estimate the potential value of your finished property, take a detailed look at the value of other properties in the area.
2. Use the investor’s rule of thumb
Experienced investors recommend keeping a renovation budget to around 10% of a property’s market value. You may want to be more conservative with that figure if you’re inexperienced, or budget 15% if you believe renovations will dramatically increase the property’s value and appeal.
3. Create a scope of work
It’s hard to create a detailed budget when you aren’t exactly sure what work needs to be done. A scope of work is a full breakdown of everything that you need to complete during the renovation, as well as timeframes and costs. A scope of work doesn’t just help you maintain your budget, it can be used to ensure that each party delivers what they promised.
4. Account for additional costs
A scope of work isn’t definitive, and there may be other costs that you need to factor into your budget along the way. If you live in a brownstone or a historically protected building, you’ll need to acquire several permits to carry out renovations. While these fees are nominal for the most part, they should still be accounted for, as should the costs for an expediter if you require one.
5. Build in a buffer
You may think that your budget accounts for absolutely everything required to complete your investment property renovation, but you never know what may come up. That’s why it’s important to build flexibility into your budget. By adding a buffer of 10%-20%, you can plan for unexpected costs without having to worry.
Our partner company, Dixon Projects, provides full-service project management for investment property renovations. They take budgeting seriously and provide market analysis to compare your project scope and budget to recent work in the area. Before beginning work, Dixon Projects will expand upon your budget, adding detailed numbers and a comprehensive strategy to ensure feasibility and identify areas of potential savings. Arrange a free consultation today to get your next project underway.