How to Get a $100K Renovation for Free, According to the Experts

There may not be such a thing as a free lunch but did you know that you can have what is essentially a free reno? If you can renovate a property, increase its value and then refinance to extract the value back out, there is a possibility that a major $100k – or even a $500k – reno could be “free” or close to it. The key here is that you need to create value. How? Matthew Lee and Ming Lim are expert real estate investors who run Volition Properties, a leading real estate investment advisory and realty firm in Toronto. They describe how they help their clients and you get “free” renos.

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Do the Reno First; Then Get Your Money Back

You don’t get your reno free right from the start. Instead, you need to have the funds available to do the reno first. Then you get the money back via an equity takeout mortgage after you refinance your mortgage at the higher property value.

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It Doesn’t Work for Every Property

To get a “free” reno, you have to create serious value through a major renovation. Not every property is a good candidate for doing a major renovation, though. More expensive, neighbouring, comparable properties need to support the after repaired value, which is the increased property value after you complete the renos.

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It Works Better for Investment Properties

Creating value through major renos works better for investment properties because, done right, you should get increased rents after renovations. Those increased rents will offset the higher monthly mortgage payments of the refinanced mortgage. If you use this strategy for your own primary residence, you may still see the value of your property increase but you will also be paying off the increased mortgage yourself.

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Buy, Reno, Rent, Refi

This strategy is so powerful that within real-estate investment circles, it’s known as the “BRRR” model: buy, reno, rent, refi – and if you are so inclined, you can add “repeat”. It is a way for real-estate investors to accelerate the growth of their portfolios in a much shorter period of time, rather than solely waiting for market appreciation.

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The Reno Needs to Create Lots of Value

If you just update your kitchens and bathrooms and other smaller reno projects, it’s possible that it will not make enough of a material difference in an appraisal and the appraiser may not think it warrants a much higher property valuation. Often, you need to do large renovations so that the updates can be considered and compared against the much more expensive homes in your neighbourhood.

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Change of Use is Often a Great Opportunity

Change of use is valuable because you are now putting your property to highest and best use. For example, you can put in a basement suite, turn a single family home into a legal luxury triplex, build a laneway suite or have the zoning changed. Now that it’s a different asset class altogether, appraisers can more easily compare your subject property to other higher-value properties with the same characteristics, like that triplex down the street that recently sold for $1.6 million.

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After Repaired Value

The after repaired value – or ARV – is key: you need to accurately estimate the value of the property post-reno. However, you shouldn’t just estimate the market ARV but also the appraisal ARV, which can often be much different. Because appraisers work for the banks and protect the bank’s interests, appraisal values will sometimes come in 5 to 10% lower than the actual market value.

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Comps Need to Support the Reno

Appraisers will look at comps – comparable homes – to determine your valuation. After selecting three to five recently sold comps, they will make adjustments to account for differences between the properties. Alternative ways that appraisers can appraise your property include the income approach – looking at how much rent the property generates – or the replacement cost approach, which looks at how much would it cost to rebuild the property from scratch.

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Increased Rents Need to Support the Reno

If this is an investment property, you should get increased rents, which offset the increased mortgage payments. So, you should focus on economical and durable renos that add value for your tenants – or the tenants that you want to attract: quartz countertops instead of marble, for instance. Higher rents make it more justifiable for an appraiser to compare against more expensive properties that also have higher rents.

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Your Own Mortgage Qualification is Key for the ARV Refi

Part of the formula to make the strategy successful is ensuring that you can qualify for the increased mortgage. This is what allows you to do the equity takeout, which is the key to paying back the cost of the reno. You need to plan this right from the beginning with your mortgage broker. Companies like Volition are strategic partners with some of the best mortgage brokers in the country, so their clients have a great chance to get their maximum mortgage qualification.

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Appraisal is Crucial – and Stressful

Appraisal is possibly the most crucial step in the process but it is also the most stressful. Volition Properties has an easy guide on how to get the highest appraisal value. It takes some additional work but the reward is so much greater.

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Where to Get the Money for the Reno

While the idea is that the reno will pay for itself, you’ll only get that money back later. Meanwhile, you need to pay for materials, contractors and the like. You can use savings, borrow from family, draw on a line of credit – LOC – or home equity LOC, cross-collateralize and use equity in another property, or take advantage of a special financial product such as a purchase plus improvements mortgage.

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Expect the Unexpected

Lots of things can change during the course of a project. There may be construction issues or costs you didn’t plan for, changes in interest rates or market conditions, tenant considerations and personal considerations like your experience level, changes in your mortgage qualification, stress or anxiety levels or your ability to manage large-scale projects that can all affect the outcome of the project.

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You Need Backup Plans

When you come up with a plan for your reno, you need to also come up with a Plan B and a Plan C, just in case. Think about every possible thing that can go awry and how you will handle it. If you aren’t okay with the outcomes of these various scenarios, then maybe you need to rethink your plan.

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Your Numbers Need to be Accurate and Your Business Model Rock Solid

Don’t guess. You need to have done the legwork and the research and should be confident that your financials are accurate to within about 5%. Ensure that you are reviewing with an expert. Look for a real estate investment advisory and realty firm that offers advisory services to clients to ensure that their risks are mitigated when undertaking such a big endeavour.

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A Real Life Example

In a recent real life example, Volition clients purchased an old single family home in Toronto for $1.3 million, with a mortgage of $1.04 million. They did a $500k reno to turn the property into a legal luxury triplex. There were about $60k carrying costs and the appraisal came in at $2 million. They qualified for the full 80% loan-to-value refinanced mortgage, which was $1.6 million. After paying out the old mortgage and accounting for carrying costs, they walked away with a $500k equity takeout, essentially getting their reno for free!