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Renovate for Profit

Renovate for profit

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When renovating for profit a number of financial factors need to be taken into consideration. Many people run out of money part way through the renovation and need to borrow more money or stop. It is important to spend time on your budget and know your profit margin. This will ensure that you take the guess work out of the job and leave you with the good rewards when your renovation is complete.Working BackwardsThe best way to success is to work backwards when creating your renovation budget. First work out what the house will be worth when the renovation is complete. You can do this by looking at the other properties in the area you are thinking of buying in and talking to real estate agents.Tip: when talking to real estate agents ask them for examples and the actual selling price not just the listed price.For example: If you estimated that a particular house would be worth $500,000 when the renovation was complete. The renovation estimated cost is $50,000 and the purchasing and selling charges are $35,000. This means every dollar below $415 minus the purchase price is profit.Working example

  • Estimated finished house $500,000
  • Renovation costs $50,000 plus a 20 per cent buffer for unforeseeable costs. = $10,000
  • Purchasing and selling costs $35,000
  • Purchase of house $385,000
  • Total Profit = $20,000

 These figures will vary greatly depending on your area, state and council costs, contractors, etc. It is very important to factor in 10-20 per cent more money for your renovation to take care of unforeseeable cost. These are timber rot, pipes that need replacing, electrical system replacement, delivery charges and emergency repairs etc. It is fairly common to remove a wall and find rotten timbers or pull up some flooring and find the foundations in need of repair.Other expensesrenovated houseThe longer you have the house the more expenses you will have to cover. Consider the following in your budget:Council rates

  • Electricity charges
  • Body corporate fees
  • Mortgage interest payments
  • Tool repairs
  • Insurance: house and public liability

TaxationTaxation needs to be also considered before you start to renovate has it can have a large effect on your profit. If you are going to rent out the property then you can claim many of your expenses as tax deductions.Common deductions

  • Council rates
  • Insurance
  • Loan interest

Other taxation deduction must be claim for over several years and are depreciating assets.Common depreciating assets

  • Borrowing cost
  • Capital works
  • Decline in value of depreciating assets

Renovation costs are classified as capital expenditure and are claimed over a number of years. If you intend to keep the property for the longer term you will need to have a tax depreciation schedule prepared. The depreciation schedule maximises your tax return and lists all of the depreciating items. To find more consult with your accountant and your national taxation body.