If you have bought a so-called "fixer upper" house for your own use or with a view to selling it on for a profit or renting it out to tenants, the chances are that you will need to refurbish it. This can be a costly and time-consuming project and you need to think carefully about how you will finance the work. In this Nethouseprices guide, we set out a few rules for obtaining refurbishment financing.
What are the benefits of refurbishing a house?
If you plan to live in the house, refurbishment will make it more comfortable for you and your family, as well as optimising its eventual resale price and reducing the amount of maintenance you will need to undertake at a later stage.
If you hope to sell the property or "flip" it, a well-executed refurbishment will not only increase its value, but will help you to move it on quickly so you can use the profits for another investment project.
If you propose to rent out the property, basic refurbishment might be necessary to make it safe and habitable. A more sophisticated "refurb" will help you to attract more affluent tenants and obtain greater rental yields.
How much will the refurbishment cost?
It's crucial that you do a careful calculation of the costs of refurbishing a particular house or flat. This is important because it will help you evaluate whether you are buying a genuine bargain that will, in due course, prove lucrative, or whether you are investing in a potentially expensive white elephant. Prospective lenders will also expect you to be armed with this information when you approach them for funds.
It's possible - probable even - that you will be able to carry out some of the work yourself, thereby cutting costs, but you shouldn't overestimate how much can be done on a DIY basis. For light refurbishment such as installing a kitchen or bathroom or plastering the walls, you should get estimates from at least three tradesmen so you can determine the likely cost of the work. For heavy refurbishment, such as work that requires local authority planning permission or where you plan to change the way the building is used - converting offices into a Home in Multiple Occupation, for instance - you should get estimates from architects and contractors.
Don't forget: If you are borrowing the funds, you need to include the costs of arranging the financing, as well as any interest payments.
Calculate the other costs
As well as the expenses associated with the refurbishment, you need to factor in legal fees, Stamp Duty and, of course, the purchase price of the property.
Calculate the Gross Development Value
This sounds technical but, for present purposes, all it means is how much you can expect to sell the house for. Speak to a knowledgeable local estate agent for an estimate of the property's resale value after the refurbishment is carried out. If you plan to let out the property, find out the relevant rental yields in the area. A lettings agent will normally be able to furnish you with this information.
How long will the refurbishment take?
Put simply, time is money, so you need to know when you will be able to live in the house, put it on the market or rent it out. As an aside, it's vital to decide whether you will supervise the project or whether you will have someone else to perform this function. The latter option will, of course, hike costs, but, if you are employed or have other investment interests, can you realistically spare the time required to monitor the work on a daily basis?
NOTE: A lender will probably want to see a timetable for the work.
If, after researching all these points, you decide that it is definitely worth investing in the purchase and refurbishment of the property, then you need to consider the best strategy for obtaining the funds to complete the project;
Light refurbishment: It might well be that you can finance the work using your own resources or by taking out a comparatively small personal loan. If you choose to borrow the money from a bank or building society, do shop around for a great deal and, crucially, don't overstretch yourself.
Heavy refurbishment: For bigger projects, you will almost certainly need to secure financing. One of the best ways of achieving this is by using a broker. A broker will have a thorough understanding and comprehensive knowledge of the finance sector and will carefully evaluate your circumstances in order to find you a great deal.
Important: Find out the broker's charges and make sure he or she is regulated by the Financial Conduct Authority (https://register.fca.org.uk) and is a member of the National Association of Commercial Finance Brokers (https://www.nacfb.org/about-us/nacfb-brokers/).
Making best use of the funds you borrow
As highlighted above, it's vital to obtain at least three estimates for the work, so you can negotiate the best possible deal. However, do check the tradesman's references and check that he has membership of the relevant trade associations. See: http://www.ukecc-services.net/ukpbata.cfm.
Also, make sure you choose an established business and check its address and VAT registration with Companies House: https://www.gov.uk/get-information-about-a-company.
Even if you have employed a project manager, do take the time to inspect the work yourself, so that you are satisfied that it is being done on a competent, professional and timely basis.
Veteran property market investors talk of how attached they became to their early projects. This is understandable, as refurbishing a house is quite an accomplishment. But, to make money and justify your expenses and effort, you need to move on quickly to pastures new. It's important, then, that you market it or take steps to rent it out as soon as is reasonably possible.
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