|"Clark, shitter's full!"|
We'll start with the purchase.
The key is to make sure the purchase price is low enough that you can pay for the renovations and still end up at or below the market prices.
Before you get started you'll need a good contractor and realtor. Don't buy a house without having experts guiding you. Trust me, the 3% realtor fee is worth EVERY PENNY.
"For Sale by Owner" = "Please Take Advantage of My Ignorance"
And unless you're Bob Vila or Mike Holmes you will have no idea what renovations are needed and how much it will all cost. So before you make an offer have the contractor go through the house with you. They will identify things that need updated and give you a ballpark estimate on cost. You want to make sure you don't pay too much for the house because you'll never get your money out.
Purchase + Renovations = Maximum Market Price
Price Per Square Foot = Home Value ÷ Square Feet
All you need to do is make sure your purchase price plus renovation costs are lower than market. So if the average price per square foot in the market is $200 then don't go above that or you'll lose money!
Our Real Life Example
Purchase Price: $230,000
House Size: 1,740 sq/ft
Price Per Square Foot: $132 per sq/ft ($230,000 ÷ 1,740 sq/ft)
Average Market Price: $200 per sq/ft
Maximum Market Price: $348,000 (1,740 sq/ft x $200)
Our Maximum Market Price was $348,000, which was the most our house could be worth after renovations. Our contractor told us it would cost $100,000 to update everything so the most we could offer was $248,000. We ended up paying $230,000, which gave us a buffer.
You have to keep in mind that market prices will fluctuate and contractors will give you different estimates based on what you want to do. However this is a simple way to make sure you make a smart decision and don't overpay for a house that needs renovations.