1. Change over from a principal and interest to an interest-only loan
When building up their property investment portfolio, a lot of investors make the mistake of taking out a principal and interest loan.

I say “mistake” because this kind of loan can put a stop to your investing career before it’s even off the ground. When you’re building up your portfolio you want to gain as much equity as possible – equity which you will then draw from your properties and use to buy more investment properties.

How many investment properties do you need? In today’s market it takes about six to become financially independent. Although it’s great to pay off debt, you don’t want to stop at one or two. That’s why an interest only loan is the best loan type at this time. Once you have reached your goals and begin to consolidate your portfolio, you can choose to switch to a principal and interest loan and begin paying down your debt.

5. Extensive mould: Untreated leaks or poor property drainage can result in mould inside the walls. Chances are, if you’re seeing black mould and the house smells musty, there is a major mould or toxic mould problem. There are a number of ways to cover the problem up, but if you’re aiming to renovate to hold, you’ll need to get rid of the problem for good, lest tenants complain. Depending on the damage, this can often be expensive.

4. Pipes: Faulty drainage systems and rusty pipes can be a magnet for termites, not to mention that they can cause their own structural damage. Pipes can be ultra expensive to fix, and since buyers or tenants don’t see them, they are a renovation expense that, while necessary, have no value-adding benefits.

3. Structural problems: Major cracks in the foundation of a house are usually signs of a serious problem. Old houses often have settling problems, but any changes that are less than 10 years old are usually the sign of an unstable house. Rebuilding the foundation will cost you an arm and a leg. The same can be said for fixing any structure that leans more than one degree.

2. Termites: Termites can eat a house from the inside out. Since they are usually eating structural parts of the house, the bill for removal and repair is usually in the thousands. If the house does not come with a clean termite bill, think again.

1. Electrical faults: Many old houses have problems with their wiring systems. If it’s necessary to rewire the house, you’ll find the cost will eat into your profit line. Not only does rewiring have no visual aspect or wow factor, but it is expensive and tenants or prospective buyers expect the electricity to work as a standard, so the fact that the house is newly wired does little to impress them.

13. Calculate what your time is worth

Apart from the first few renos, you’re wasting your time being on site – except as a project manager. If you think you have loads of free time and spending your weekends and evenings renovating sounds like fun, then go knock yourself out. And once you’ve learnt your lesson, knock that attitude out of your head. To an investor, renovating is merely a means to an end.

DIY renovating means you need to live nearby. You also need handyman skills or a keen attitude to learn. If the renovation opportunity is not in an appropriate market, you may run into profit problems, even if the project itself went rather well.

For the renovation to be considered a success it must earn you more dollars for your time than a part-time job you could pick up. It needs to earn you a lot more dollars in fact. That’s because your part-time job doesn’t have a risk of failure like the reno does.

The whole idea of the reno is to force the issue of equity gain and force it with big numbers. If it’s not big numbers, you may as well work a part-time job for some extra cash, rather than put your effort into the reno.

12. Calculate the return on investment (ROI)

The ROI is the total profit after considering tax, divided by the total amount of money you put into the deal, calculated as a percentage. The money you put into the deal consists of:

The net profit is the sale price minus exit costs and tax. The ROI is the after-tax profit divided by the money you put into the deal as a percentage.

For example, a $400,000 property purchased with an 80% loanto- value ratio might have entry costs of $100,000 (don’t forget your own time). The renovation and holding costs might total $50,000 (don’t forget your own time). So the total investment is $150,000.

If the sale value is $525,000, then the gross gain before exit costs and tax would be $125,000 ($525k minus $400k).

Subtract from this the reno and holding costs and you have $75,000. However, the exit costs might be $12,000, leaving you with a net gain of $63,000.

Assume the property was flipped within 12 months, at a marginal tax rate of 30%, and you’re left with $44,100 in hand after tax. That means your ROI is 29.4% ($44,100 divided by $150,000 as a percentage).

If your marginal tax rate is 30 cents in the dollar, it’s unlikely a part-time job would earn you $44k over the project timeframe. And a 30% ROI is better than money in the bank. But is it the best investment you can do?

11. Keep your experts informed

Let your accountant know your plan before you buy. They can advise you on tax considerations and the best ownership structure for the project.

You might like to also let your mortgage broker know your plan before you buy. For example, if you plan to flip, they won’t advise a fixed interest rate or principal and interest payments.

10. Know the holding costs.

Holding costs will consist mostly of interest payments on the mortgage but also possibly rates and insurance, depending on the duration and nature of the reno.