Value-Add Renovations & Appreciation Opportunities For Residential Properties In Toronto!
When you buy freehold investment properties, there are generally two options.
- You can either buy a turnkey property where everything is renovated for you already and rent it out on day one.
- The second option is to buy a property that needs some work, and because you need to put in the work to upgrade the property yourself, you are able to get better investment returns than if you buy the turnkey property.
Typically, you can get 1 to 1.5 times extra returns compared to how much you put in. For example, if you put in $50,000 into renovations, then your property might go up by $125,000, so you make $75,000 by doing the work.
There’s different types of value add work that you can do the existing properties, some that are easier which gives you lower value add returns. As things get more complex, then you typically can get better returns.
Even though you can get better returns with complex projects, we always recommend starting small so you gain the experience before you tackle more challenging projects. This way, you build up the experience, and the chance of success is better. With experience, renovations might take a shorter time, you make less mistakes, and all these things will make your returns even better.
The most popular type of value add work that our newer real estate investors take on are cosmetic renovations. These usually include things that don’t require permits, like replacing kitchen cabinets, appliances and other fixtures, painting. These projects are relatively straight forward and there’s not many unknowns to it. They typically take around 1 – 2 months to finish up and usually cost around $10,000-$20,000.
Cosmetic renovations can go a long way – it’s very possible to see a 1 – 1.5 times additional returns by putting in these cosmetic renovations. So if you put in $20,000, you can bring up the property’s value by $50,000 which means you pocket the extra $30,000.
Now let’s move up to the next level or risk and reward. Once you are comfortable in cosmetic renovations, you may want to tackle structural, electrical or plumbing, HVAC related renovations.
Now these are a bit more complex because of the unknowns – most times you’re fixing problems and you really won’t know how big a problem is until you take things apart. For example, if there’s a leaky roof, does it just require minor patch ups or do you need to redo the entire roof plus the drywall inside? If there’s a leaky basement, do you level the ground next to it to redirect the rain water away, or does it require that you redo the basement foundation ball?
These type of structural renovations typically take longer to complete and cost more. Structural, plumbing and electrical renovations can range from 30K and up, but if you do this, you’re likely to reap much higher returns from the value add work.
Increasing The Number Of Units
As we move up the risk curve, you can increase the number of units in your existing property. Most single family freeholds in Toronto are allowed a secondary suite and the benefit of this is that you’ll be able to get better rental income compared to renting it out as one unit. There’s also lower tenant concentration risk because your rent is split between different tenants.
Upgrading the number of units is essentially just like the structural renovations, but you’ll most likely have to do structural, electrical, plumbing and HVAC renovations instead of just one or two of them. This means the renovation can be more complex, and will take more time and money. We’re typically looking at adding another $30,000 plus in renovation costs, but you’ll benefit from better cash flows and an uptick in property value.
Increasing Square Footage
At the top of the risk / reward curve, we have adding square footage next. This is by far the most complex one out of the value add renovations that we recommend, but also the where you can reap the biggest rewards. If you’re looking to put your money to best use for real estate, it’s good to keep this in mind before you buy a property.
For example, if you buy a house with a laneway, it may qualify for a laneway house. Even though you don’t decide to build one on day one, that house with the added laneway house potential will give you better investment returns potential vs one without it – and even if you don’t tackle it on day one, it’s a possibility down the road so the house with a laneway is a better real estate investment with more value add potential. Simon on our team is in the process of working on a laneway house so stay tuned for future videos where we hope to dive into this a bit more!
How We Can Help
At the end of the day, if you are willing to put in the time, extra money, and take more uncertainty, you are likely to get better real estate returns. Value add returns comes from a one time boost in your property’s value post renovations, plus you can usually get better total rents than pre-renovations which takes your total returns even higher.
Our clients benefit by leveraging our team’s experience as expert real estate investors. You get access to our dedicate network of contractors and we’re here to guide you whenever you need help – and this experience can reduce the uncertainty from value add renovations, which lowers your risk and can get you better returns from value add work