Some luxury estates built pre-2000s need renovation to match contemporary home buyer needs with the neighborhood’s price point. With other dated properties, it may be more cost-efficient to demolish the existing structure and rebuild. It’s not uncommon in some luxury markets to purchase a primely located property solely with the intent to raise new construction. How do real estate investors know if the best option is to renovate or new construction? Consider:
1) The property
The structure’s condition and style play a significant role in remodeling decisions. If renovations to the existing structure can add significant value, it may be worthwhile. Sometimes rehabilitating a kitchen, swapping bath hardware, and replacing flooring work wonders on an outdated space. Repurposing a space to meet new market trends can add thousands in value to an existing structure. Think about adding a guest bedroom, an entertainment center, or creating an open floor plan.
Another factor: is there something inherently unique in the existing home worth keeping? For instance, a modern architecture home designed by a renowned builder might be worth preserving its overall integrity and for marketing purposes. Or, some buyers love the story behind historic homes, which may have local regulations requiring certain features remain intact.
2) Neighborhood Trends
Comparables factor into demolition considerations. The existing structure should not be wildly out of line with similar neighborhood homes. A small cottage from the neighborhood’s early days as a sleepy hamlet likely doesn’t fit into an up-and-coming professional neighborhood. In this case, demolishing and rebuilding a larger, family-friendly structure could yield more returns than trying to add space through renovation.
3) ROI
The renovate vs rebuild debate will always boil down to the return on investment. Run the numbers for both scenarios. What could a renovation earn against cost invested compared to a new home’s cost and potential sale price? The potential earnings make clear the best path for real estate investors on any given property.
Whatever route is taken, be smart about the financing and timeline on your project. A new luxury construction project will need different terms from a renovation. The right terms preserve the profit expected from the luxury fix-and-flip project.