Would you pay more for a value add ip if you can get discount?

[TMNT]

Sorry the title is misleading but

Say the market value of a property that requires work is 200k for example
You need to do 50k worth of Reno to get it revalued at 280k for example

However these properties seem to be getting snapped up very quickly at 200k

Say you have found a guy or a way to do this 50k Reno for 40k for whatever reason

Would you pay 210k for this property given that your net profit will be the same but you are essentially overpaying based on your strength in getting a better bargain

Half of me says if you can pick up multiple properties for 210k then since the net profit is the same then why not?

The other half says why pay more then market price?

 

[Jake Milne]

I think you've answered your own question. It's often better to pay a little bit more than the competition to secure a good property than waiting for a dud that you can buy for cheap.

As long as the profit margin is big enough (including buffer) then who cares?

Here's a basic formula to use for feasibility of renovations:

Assume

• The median value of the suburb you're buying in is $400,000 and renovations will cost 10% of the median. Call this (d)
• The return you are looking for is 20%. Call this (b)
• The maximum comparable sale price in the area is $580,000 and 80% of properties in the area have a value less than this amount. Call this (c)
• Your purchase price must then equal (a) or below.

Formula:
a = c / (1 + b) - d

Formula with assumptions:
a = $580,000 / (1 + 20%) - $40,000

a = $443,333 - this is your maximum purchase price.



The assumptions can be changed to suit your situation.

You might assume that the median is $250,000
d = $12,500 (5%)
b = a return of say 20%
c = $280,000

So...

a = $280,000 / (1 + 0.2) - $12,500
a = $220,833.33


You'll have to do your costings to see if (d) is a feasible reno budget.
You'll also need to research if the specs you can afford at $(d) minus $labour will increase the appearance enough to equal (c).

Let me know you need me to elaborate.

 

[TMNT]

Fantastic post"!!! Kudos to you

Question

Is the 20% referring to net return of total equity invested or cash invested?
Just a bit confused

I usually go for properties under a certain price with a net equity gain of $x instead of %

So in my case
I would take both of

Buy $1, Reno 100k, sell for 130k
Vs
Buy 90k,Reno $10k, sell for 130k

Obviously neglecting cash required and the fact that 100k Reno requires more time then 10k

 

[CHAOS]

Great Formula Jake.

 

[Ace in the Hole]

Use Reno Funders, no gain no pay.

 

[Jake Milne]

Thanks guys. The % is gross equity; you'll have to factor in purchase costs, lending and reno costs after.

The advantage of this formula is that it takes into consideration how much you should spend on a renovation per the suburb your buying in. Spending $10,000 on a renovation in Armadale, VIC would be silly when the 2 bed median is closer to $600,000 and the market expects a higher quality finish... Most apartment reno's I project manage there cost about $40k - $60k.