Most people I have asked whether they thought it was better to buy an apartment that was already renovated or to do the renovations themselves did not have an unequivocal answer. I am not surprised: there is more to this question than meets the eye, as both options have clear advantages and disadvantages. So the answer in most cases is “it depends.”
The preliminary questions you have to ask yourself are:
How much equity (your own funds) do you have to purchase the house?
Do you have time and experience with renovations?
What will the primary use of the house or apartment be?
HOW MUCH EQUITY YOU HAVE
Your own funds, or savings, need to suffice to cover three concepts:
- The down payment: the part of the purchase price that is not financed by the mortgage. Nowadays in Spain, residents can typically obtain up to 80% financing, meaning a 20% down payment. For non-residents, financing is generally limited to 70%, requiring at least 30% in own funds.
- The expenses associated with the purchase: the ITP (property transmission tax), the notary and registry fees, your buyer’s agent’s fees, the cost of the official appraisal … the total amount will vary, but a good rule of thumb is to put aside 10% to 12% of the purchase price for taxes and standard purchasing expenses.
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The renovation: the cost of the renovations is generally not covered by the mortgage either, thus you have to estimate approximately how much the renovations will cost, and see if you have enough funds for them.
Depending on how much money you have saved and can invest in your purchase, paradoxically it may happen that even if you would prefer to buy an apartment that needs renovating, you might not be able to afford it!
Let’s see an example:
Imagine that you have € 150,000 in savings. The apartment you like costs € 450,000, and needs about € 30,000 – € 40,000 in renovations. Assuming you qualify for 80% mortgage financing, if you put aside € 90,000 (20%) for the down payment and about € 45,000 (10%) for the expenses, you are left with € 15,000 to spend on renovations. Clearly, your funds are not enough. You could not afford to buy this apartment and renovate it yourself.
However, this very same apartment, if it were sold already renovated, would probably cost around € 500,000. If you bought it, you would pay € 100,000 down payment plus € 50,000 expenses. With your € 150,000 of savings, you could afford to buy the renovated apartment.
You may have noticed that buying the renovated apartment in this example, you are paying a € 10.000 – € 20.000 “surcharge”, because the price difference between the to-be-renovated purchase price and the renovated purchase price is greater than the estimated cost of the renovations. This is quite normal: whoever sells a renovated property wants to get a compensation for the time, money and effort they invested in carrying out the renovations.
This example illustrates why buying a fixer-upper and renovating it yourself can often be more profitable, provided you can afford the renovation and keep costs under control. But as you have seen with the above example, if you do not have enough savings to pay for the renovations, buying an already renovated apartment can be more financially viable.
At Property Buyers by Somrie, when we work for a client who doesn’t have a clear preference for a renovated or non-renovated apartment, we always do a quick financial analysis before even starting to look for an apartment or house. We start with a mortgage study to find out what maximum mortgage amount and LTV (“loan-to-value”, ie. percentage of financing) the banks are going to grant. With this info, it is easy to calculate how much will have to be spent on the down payment and expenses. As for the cost of the renovations, we have contacts in the sector who can help us estimate the likely renovation budget. Thus, when it comes to choosing an apartment, our clients can make an informed decision, knowing whether the numbers are likely to add up!
There are exceptions: some mortgage products may finance part of the renovation costs, subject to the lender’s conditions.
EXPERIENCE IN RENOVATIONS AND TIME
People have a love-hate relationship with house renovations. There are those who love to do them, while others consider them a real nightmare. Whatever your case may be, one thing is clear: renovations require time and dedication.
There are 3 types of people who generally prefer to AVOID having to renovate:
- People who are not physically in the city where they want to buy. They tend to buy apartments that have already been renovated because they do not know trustworthy renovation companies in the area and find it difficult to properly monitor the works.
- People who, due to their jobs, have very little time.
- People who have had bad experiences in the past with renovations.
The main risks involved in doing a house renovation are that it can take longer than expected, and cost more than expected. Steps can be taken to minimize these risks, but it is impossible to completely eliminate them, and unforeseen problems can arise even with the most thoroughly planned project.
What can our buyer’s agent team do to help clients in this situation? When we work with someone who would prefer to renovate but doesn’t have the time, local contacts or experience to manage the project, we can offer additional post-purchase assistance. We can recommend reliable contractors whose work we know and, if needed, provide renovation supervision and regular progress updates. Just as we’ve acted as our clients’ “eyes and ears in the market” during the property search, we can continue to do so throughout the renovation process.
And let’s not forget that our buyer’s agent service includes an independent technical assessment by a qualified technician, who examines the property and building for observable defects, structural concerns and other potential issues before our clients commit to the purchase.
WHAT WILL YOU USE THE PROPERTY FOR?
This question is possibly the most important one. The property might be intended as your primary or secondary residence, an investment to resell, or a rental property.
Let’s analyse whether it is better to buy a renovated or a fixer-upper apartment in each of these cases:
If you are going to buy a home for personal use
In general, renovating the property yourself can be more appealing, because this way the outcome will be exactly to your liking, you have control over the quality of the materials used, and the final result will fit you like a glove.
But of course, it is often not that simple: you have to take into account the other two questions as well, that is, whether your savings are sufficient to pay for the necessary renovations, and if you can afford the time it will take to finish the works.
Imagine that you need to sell before you can buy: it would not be very practical to get into a full home renovation because you have already sold your previous home and need a place to live (you and all your stuff).
Another very clear example: you are moving to a new city because you are starting a new job. Again, it is not practical to get into a huge renovation because you might not have that much time. In these cases, I usually recommend buying a nicely renovated apartment, or even a furnished one!
If you are going to buy a home to resell it
The answer in this case is fairly straightforward: if you’re planning a classic fix-and-flip investment, you’ll generally want to buy a fixer-upper and renovate it yourself.
The very concept of “fix & flip” says it: buy, fix, sell. It’s about buying at the right price, adding value, and selling at a profit.
The two secrets of success in this type of operation are buying at a sufficiently low price (and properties in poor condition usually have a greater negotiation margin) and keeping renovation costs and timelines under control, so that your profit margin does not dwindle. Don’t forget to factor in purchase and resale taxes, transaction costs and holding expenses, too.
If you want to buy-to-let
If you are buying a house or an apartment with the intention of renting it out, the answer to the question of whether it is better to buy a renovated apartment or a fixer-upper is once again “it depends”.
Advantages of buying a fixer-upper:
In general, it can be more profitable to buy something that needs quite a bit of work, because if you bought an equivalent, already renovated property you would be giving up part of the profit, and handing it over to the person who did the renovations. In other words, the total investment can be lower (and therefore the return higher) if you buy and renovate yourself than if you buy something already renovated.
Also, I usually warn my clients that not all renovations are the same. I tend to be cautious about renovations done by “fix & flip” investors (buy-renovate-resell), because their profit is inversely proportional to the cost of the renovations, and therefore some may be tempted to cut corners and save costs on things that are not visible to the naked eye but that can cause problems for the future owner down the line (installations, waterproofing…). This would be another point in favour of doing the renovations yourself – you control what’s being done and how!
Advantages of buying an already renovated apartment:
The main point in favour of buying something already renovated is that you can start earning a return on your investment sooner.
This is no trivial issue, because if you buy a fixer-upper and do the renovations yourself, you will be putting money and more money into the property during an uncertain period of time without getting any rental income out of it. So in addition to the cost of the renovations themselves, you have to account for the following expenses during the weeks or months that the works last:
- mortgage payments
- community expenses
- utilities
- opportunity cost (= what you could be earning if you invested elsewhere)
All in all, you have to take the “surcharge” of buying a renovated apartment, subtract the additional costs and lost rental income associated with renovating a fixer-upper, and consider the difference over the number of years you plan to hold the investment. Perhaps you will be surprised by how small the difference is. With these numbers in mind, some investors decide that they prefer to buy a property that doesn’t need any work done and is ready to be rented out immediately. Others even decide to buy a house or apartment that is already rented out and comes with a solid, reliable tenant!
You might be thinking now: OK, but what about the problem you mentioned above, about not all renovations being equal and the need to be very vigilant about quality? Well, one possible solution is to buy something that has been renovated by a reputable company, one that comes with good references, such as the one that did the spectacular transformation you can see in the main image of this blog post:Dosplanos.
Conclusion: is it better to buy a fixer-upper or an already renovated apartment?
As we’ve seen throughout this post, it really depends. You have to bear in mind the funds or savings available to you, the experience and time you have to manage a renovation, and the use that you are going to give the house or apartment you buy. It’s a case-by-case assessment: do the numbers carefully, and if in doubt, get some advice from experts!
* Attention, there may be exceptions to this: in some cases banks can give a higher or lower LTV; some mortgages can finance a part of the cost of the renovations (for example, the “Suma” mortgage from UCI); and there are also some banks that will add some of the expenses to the mortgage as well. These are specific cases, and with very specific conditions, not available to everyone or in all cases, but they do exist.
