A tired property can look full of potential. But before becoming emotionally committed to the purchase, I want to understand two things: is there enough profit in it, and what is the best strategy for this particular property?
I've been involved in property investment and refurbishment since the 1990s, alongside larger development projects. A refurbishment appraisal should test the opportunity before you buy — whether the intended exit is to sell or to refinance and retain it as a buy-to-let.
A real Sheffield refurbishment project
The following figures come from one of my own refurbishment projects. I have deliberately not identified the property because the lesson is in the appraisal rather than the address.
I purchased the property for £130,000. My original appraisal allowed £26,300 for refurbishment and associated buying and selling costs, producing a projected total investment of £156,300. I expected the completed property to sell for £170,000, giving a projected profit of £13,700.
The refurbishment cost more than expected
The actual refurbishment and associated costs finished at £32,187.60, around 22% above the original £26,300 allowance.
One of the largest movements appeared within the decoration figure: £4,500 had been allowed and the final figure was £7,027.67.
When spending more can be the right decision
Simply describing that increase as an overspend would not tell the full story. During the refurbishment, we decided to improve the property by adding an en-suite. The decoration figure included additional work required to create the new walls for the en-suite.
It was therefore partly a conscious decision to improve the specification, rather than simply allowing the original work to run over budget.
There is an important difference between losing control of a refurbishment budget and making a considered decision to spend more because you believe an improvement will add greater value.
That doesn't mean every upgrade is worthwhile. Additional spending still needs a commercial reason behind it.
The end value changed too
Our original appraisal anticipated a sale at £170,000. The completed property actually sold for £190,000 — £20,000 above our original expectation.
Despite the higher costs, the project appraisal recorded an actual profit of £27,812.40, compared with the £13,700 originally projected.
| Projected | Actual | |
|---|---|---|
| Purchase | £130,000 | £130,000 |
| Refurbishment & associated costs | £26,300 | £32,187.60 |
| Total investment | £156,300 | £162,187.60 |
| Sale price | £170,000 | £190,000 |
| Profit | £13,700 | £27,812.40 |
The lesson isn't that going over budget doesn't matter. It's that both sides of the appraisal can move. Costs need controlling, but you also need to keep testing the likely end value as the project and specification develop.
A quick refurbishment and resale
This was very much a refurbish-and-sell project rather than a long-term investment. The purchase completed on 8 February 2019 and the subsequent sale completed on 20 August 2019.
That meant the entire period from buying the property to completing its resale was just over six months.
A £27,812 profit achieved over a relatively short project has a very different capital profile from the same nominal profit earned over several years. Time, finance and the opportunity to reuse your capital all matter.
What if we'd kept it?
This particular project was refurbished and sold, so I won't invent a historical rental figure simply to make the numbers fit a buy-to-let example. But when I'm assessing a refurbishment, I don't necessarily want to look at only one possible exit.
Before buying, I would also consider whether retaining and refinancing the finished property could make commercial sense. That requires its own appraisal: realistic rent, post-refurbishment value, available borrowing, finance costs, ongoing expenditure and how much of my own money would remain tied up after refinancing.
A good flip doesn't automatically make a good buy-to-let, and a good buy-to-let doesn't automatically make a good flip.
Have more than one exit — but appraise each one properly
Alternative exits can be valuable because markets, interest rates, values, rents and circumstances change. But I wouldn't buy something on the assumption that, if selling doesn't work, I can simply rent it out. The rental appraisal needs to work in its own right.
Likewise, a strong rent doesn't automatically mean you've bought at the right price. Each exit strategy needs its own appraisal.
The spreadsheet isn't the development
A spreadsheet is extremely useful, but it only calculates the assumptions you put into it. This real project demonstrates that the final costs and final value can both differ from the original appraisal.
Experience helps you challenge those assumptions and decide when a change to the specification is commercially justified.
A refurbishment can also be a very good way of gaining practical development experience: sourcing, negotiation, finance, budgeting, contractors, cost control, unforeseen problems and the eventual exit all have parallels with larger development projects.
Thinking about a refurbishment?
We can work through the actual purchase price, refurbishment budget, end value, rental potential, finance, risks and possible exits around your project — whether it's your first refurbishment or part of a larger development strategy.
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