The ‘Buy, renovate and sell or hold’ strategy can maximize potential gain by improving areas of the property that are unsightly such as an un-landscaped front yard, a messy entrance way, a run-down bathroom or kitchen. This is a good strategy for those with the time and skills (i.e. tradesmen or women) that can complete the renovation themselves.
It is an exceptionally good strategy for those that have the lifestyle suitable to living in the property for a year or more, whilst they renovate it, and then sell it.
The main disadvantage of this strategy is the chance of getting it wrong and making a loss. Transaction costs are another major disadvantage of this strategy. In a market moving quickly upwards, good profits can be made. In a slower moving market you need to make serious gains on your improvements just to cover the transaction costs.
BEWARE THE TAX MAN
If you use this strategy too often you might lose your capital gains exemption. You could also be viewed by the tax man as a property developer and lose the capital gains 50% exemption. A bad outcome – so seek professional advice.
“Adding value by carrying out improvements needs to be carefully planned and executed. Not everything adds value. It is easy to over-capitalize and not get your money back. What you do need to be is market appropriate.”