12 February 2020 - Given the recent popularity of several reality TV programmes about how to purchase, renovate and flip homes for a profit, many people have been inspired to do the same here in Hong Kong. While it looks relatively easy to do during an hour-long TV show, there is a veritable minefield of problems that can arise, and decisions to be made which the novice real estate investor can come to regret down the road.

For this reason, before undertaking any project of this kind, it is essential to consult a qualified property agent who is expert at not only identifying properties with great resale potential but can also steer you away from common mistakes re-sellers often make during the process.

Real estate investing in Hong Kong requires vast sums of money, so you don’t want to get tied up in a property that will take years to sell in order to recoup your investment.  In worst case scenarios, a buyer may be forced to resell a property at a loss, a mistake no one certainly ever wants to make. A seasoned property agent, however, has the experience to help you determine how much you can potentially gain after renovating a flat.

Most investors need to have this type of comprehensive guidance in order to maximize the value of a home before reselling it.

Knowing which improvements add value and which don’t

When improving an investment property for resale, you naturally want to factor in the value that  you’re adding to a property versus the investment costs because this is directly related to the ultimate price. You’ll need to know where renovation is required and where it’s not. There’s no need to do a complete home renovation when it’s only the kitchen that has to be refurbished to increase the property’s value.

Property agents with the right experience and mindset know what buyers or tenants are typically looking for and what they care about. This information is critical when deciding  on what type of renovations to undertake  in order to maximize value. They can also advise on which types of renovations are safer investments or simpler construction projects, and which could create problems down the road.

For instance, wall-to-wall carpeting, extensive landscaping or expensive built-in lighting may seem like significant aesthetic enhancements.  However, they may not add any commensurate value to a home in terms of what a buyer will pay.  Similarly, ‘invisible improvements’ like installing a plumbing system using world-class materials or enhancing a home by installing a brand new air conditioning system with the addition of a new HVAC system can require a huge investment, but may not lead to a resale value that’s profitable overall.

Another point to consider is ensuring that you never renovate your property at a value that significantly exceeds other properties nearby as it may scare away potential buyers if it’s priced significantly higher than other comparables in the building. Looking at it another way, your beautifully renovated unit may not attract a luxury purchaser, even if they can afford the high price.  They’re likely to prefer to be in a higher grade building or neighbourhood, even if they love your unit.

On the other hand, certain renovation work will absolutely add value to a property and lead to a profit. A case in point is adding new flooring or remodelling a bathroom. Upgrades of this kind should be of primary focus since potential buyers tend to consider these areas first when considering a home. Thoughtful changes to the layout, an open kitchen or clever built-in storage additions can also create a unique sense of space for a relatively small investment.  But you’ll certainly need to sort out which interior renovation companies will do the best job for the best price. Again, this is also the kind of information a qualified property agent, working in your corner, will be able to help you with.

Construction costs

Ultimately you must carefully evaluate the outlay costs of renovations relative to the returns you’ll likely receive from a sale. Work closely with your property agent before you make the initial purchase so that due consideration will be given to the funds you’ll need to spend on any upgrades. With properties it all comes down to ‘upgrade costs’ versus ‘ultimate value.’

When you sell, your property should be not be priced too far above homes of a similar size and quality in that building or neighbourhood. This should be considered before you begin, of course. It is not uncommon for renovated properties, even after extensive and expensive renovations, regardless of how beautiful they may be, to only fetch the normal standard market prices in a given area or building.

This is why it’s important to never ‘over-renovate’ a property you’re aiming to sell for a profit. Aim for that sweet spot of optimal renovation investments in order to avoid the situation where, in order to make a profit, you must sell at a price far higher than the value of neighbouring properties.  Otherwise it could make it difficult to ultimately find a buyer willing to pay a steep premium. As a general rule of thumb, investing more than 10% of the purchase price of the property is not advisable as it is hard to recoup when the property is sold. Of course, this depends on the individual property and price you acquired it for to begin with.

Connections and resources

An experienced agent will not only guide you in making wise decisions, but can also introduce you to their network of designers and contractors to provide ideas, cost estimates or advice on building approvals. 

Reliable contractors are an especially important part of any successful renovation project. A good agent can introduce contractors with whom they’ve worked with previously and vouch for. Also, a referred contractor will value their reputation and relationship with an experienced agent and will want to ensure that agent refers future clients. As such, they will take extra care to help stay within budget, adhere to timelines and deliver a quality finished product. They’ll also be less likely to view your project as a one-off with little consequence if they fail to deliver. It’s not necessarily foolproof but it more closely aligns the contractor’s interests with yours.

Conclusion

An experienced agent can do much more than simply introduce properties. They can be an important and valuable asset in the process of investing for the purpose of reselling at a profit. The pitfalls mentioned here as well as many others can be avoided by teaming up with a real estate professional who has the knowledge and experience to guide you. Their interests are aligned with yours because they will not only want to help you make a good investment but, if they’ve done a great job, will also want to help you sell the property when the time comes.

So find a great agent who wants to create a long-term relationship and future referrals.  They’ll be vested in your success and bring great value to your real estate investments.