Renovating An Investment Property? Start With An Appraisal

Your investment-property renovation can payoff in a big way if you keep costs in line with the property's value. Although some renovations increase the property's market value, others make your property more marketable, whether you're renting it out or plan to list it for sale. Doing your homework before you break out the checkbook and then planning the work accordingly helps to ensure that you get the biggest bang for your renovation buck.

1. Bring in the Experts

A real estate appraiser (such as one from Accumark Appraisals Ltd.) determines a property's value by comparing it to similar, recently-sold properties located in the same market area as the subject property. An appraisal is a vital first step because it provides a baseline by which to evaluate budget and construction decisions. Run some what-if scenarios with the appraiser to find out how different renovation decisions might affect the valuation. Confirm your appraiser's credentials by reviewing The Canadian National Association of Real Estate Appraisers directory.

It's also prudent to meet with a commercial real estate broker. A broker has the benefit of working in the trenches with investors, and thus can offer unique insight into the local market conditions.

 2. Set Your Budget

Avoid overcapitalizing by setting a budget that falls somewhere between your current market valuation and the valuation the appraiser says you'll have after the renovation. PropertyTutors recommends keeping the total within 5 to 6 percent of the property's current value. In addition to the construction costs, take into account losses you'll incur if you'll take your property out of service during the renovations.

 3. Shop for Contractors

If you don't know a good contractor, talk to the broker and other investment-property owners for suggestions. Invite several contractors in for a walk-through and a discussion about options that work with your budget. The contractors often can't guarantee their estimates will be to-the-penny accurate, but the one you choose should agree to keep costs within a certain range of the estimated price. Budget a little more than the ceiling in case unforeseen circumstances require that additional work be done.

4. Additional Considerations

Remember to factor in the costs of financing if you'll need a loan to do the renovation. Application fees, closing costs and interest add to the cost of the work. You may also be charged for a bank appraisal. On the upside, you can depreciate the property and write off many of the costs associated with renovating it. Those tax benefits help you stretch your renovation dollars further over the long term.

Renovation projects are rarely uncomplicated. However, when you know your property's value before work begins and have a sense of what the value will be after the work is complete, the other pieces often settle into place.