How much should I spend on renovations on average?

[Joseph Fenner]

Title says it all. Since I am starting out, I am just curious about how much you guys spend on renovations or if there is a rule of thumb? I want to calculate it as a percentage of the purchase price that I can apply to different properties with different situations. This will help me so I don't spend too much on renovations.

[KC Pake]

Quote from @Joseph Fenner:

Title says it all. Since I am starting out, I am just curious about how much you guys spend on renovations or if there is a rule of thumb? I want to calculate it as a percentage of the purchase price that I can apply to different properties with different situations. This will help me so I don't spend too much on renovations.

Joseph,

Good question.  I don't have a 100% bulletproof answer for you because these numbers are subjective and vary based on factors, like; Location, Market, Investment Strategy, etc... I can give you a general response with some starting points to consider.

These are some general guidelines and strategies you can consider to help make informed decisions:

1. Percentage of Purchase Price: A common rule of thumb is to limit your renovation budget to a certain percentage of the property's purchase price. While this percentage can vary, a common range is 20% to 30% for a flip and 10% to 15% for a rental property. However, this is very dependent on the specific circumstances of the property and the market.
2. After Repair Value (ARV): For flips, investors often use the ARV to guide their renovation budget. The formula is to buy a property so that the purchase price plus renovation costs do not exceed 70% of the ARV. This means if a home's ARV is $100,000, you would aim to keep your all-in costs (purchase plus renovation) under $70,000.
3. Fixed Budget Strategy: Some investors set a fixed budget based on the scope of work needed. This involves getting detailed estimates for all renovation work planned and adding a contingency budget (usually 10-20% extra) for unforeseen expenses.
4. The Minimalist Approach for Rentals: If your strategy involves renting out the property, focusing on essential repairs and cosmetic updates can maximize ROI. Prioritizing renovations that increase rental value or reduce long-term maintenance costs is key.
5. Market Research: Understanding your market is crucial. Spending too much on renovations in a neighborhood that doesn’t support the increased value can lead to losses. Research local market trends, understand what features are in demand, and tailor your renovations to meet those demands without overcapitalizing.

Best of luck with your investments!

KC