Renovation ROI: how to calculate it before you buy, the professional way

An investor who buys a flat to renovate and let (or renovate and sell) needs to calculate the return on the renovation before carrying it out, not afterwards. Doing it the other way round (renovating according to what looks nice and calculating the return once it's finished) is the source of most of the financial problems in renovation projects in Spain.

The ROI of a renovation can be calculated rigorously before you start, and doing it properly is what separates the professional investor from the enthusiast who renovates on an aesthetic whim. This guide explains the method step by step.

The fundamental principle: a renovation has no fixed ROI, it depends on the market

The idea that "a renovated kitchen always adds X euros to the value of a flat" is false. The value a renovation adds depends on three variables that are entirely specific to each market and asset:

• The price of renovated comparables in the same area: If renovated flats in that neighbourhood sell at €1,800/m² and unrenovated ones at €1,300/m², the renovation adds €500/m². That is the ceiling on what you can recoup with the renovation, whatever it costs.
• The size of the asset: In a 40m² flat, a €20,000 renovation means €500/m² in renovation costs. If the price gap between renovated and unrenovated is €400/m², the renovation destroys value. In a 100m² flat, that same €20,000 renovation costs only €200/m², which may well be recoverable.
• The current condition of the asset: A flat in very poor condition (old installations, a poor layout) can benefit more from renovation than one that is already in acceptable condition but dated.

How to calculate the ROI of a renovation for letting

For the renovate-to-let model, the calculation has to answer this question: how much does the renovation add to the monthly rent I can charge, and in how many months will that difference in rent pay back the renovation?

A practical example:

• Unrenovated flat: lets for €600/month in that neighbourhood.
• Equivalent renovated flat: lets for €750/month in that neighbourhood.
• Monthly rent difference from the renovation: €150/month.
• Cost of the renovation: €12,000.
• Payback period for the renovation through rent: €12,000 / €150/month = 80 months (6.6 years).

Is that ROI acceptable? It depends on the investment horizon. If you plan to keep the flat let for 10+ years, you recoup the renovation with 3.4 years of extra rent still ahead. If you plan to sell in 5 years, the renovation isn't recouped through the rent. You then have to consider whether the renovation also adds enough sale value to make up for it.

How to calculate the ROI of a renovation for resale (flip)

For the buy-renovate-sell model, the calculation is more direct:

• Sale value of the renovated flat (V_renovated)
• Purchase price (P_purchase)
• Cost of the renovation (C_renovation)
• Purchase costs (ITP, the Impuesto de Transmisiones Patrimoniales or property transfer tax; notary; land registry) = E_purchase
• Sale costs (agency commission; plusvalía municipal, the local tax on the rise in land value; IRPF, Spanish personal income tax, or IS, corporation tax, on the gain) = E_sale
• Net profit = V_renovated - P_purchase - C_renovation - E_purchase - E_sale
• ROI = Net profit / (P_purchase + C_renovation + E_purchase) × 100

The most common mistake is to calculate the profit without including E_sale (IRPF on the capital gain, the plusvalía municipal, the agency's commission). Those costs can reduce the apparent profit by 20-30%.

The renovation items with the best ROI in the Spanish rental market

The order of priority for renovations according to their usual ROI in the Spanish rental market:

1. Electrics and consumer unit: Compulsory in old flats; it directly improves the chances of obtaining a cédula de habitabilidad (certificate of habitability) and of letting without problems. High indirect ROI, because it unlocks the letting.
2. Plumbing and drainage: Similar to the electrics. Needed to unlock safe letting. High indirect ROI.
3. A complete bathroom: The space with the biggest impact on how the tenant sees the flat. A €3,000-5,000 bathroom renovation in an average flat can add €50-80/month in rent. ROI in 37-100 months of extra rent.
4. Kitchen: The second most valued space. A €4,000-8,000 renovation can add €50-100/month. ROI in 40-160 months.
5. Painting throughout: The lowest cost with the highest visual impact. €1,500-3,000 for an 80m² flat. It potentially adds €20-30/month or makes it easier to sign a contract sooner (reducing voids). Very high ROI.
6. Floors: Floating floors or microcement. A cost of €2,000-5,000 for an 80m² flat. High visual impact, but it adds few euros to the monthly rent in the mid-market.
7. Joinery and doors: Low ROI in the standard residential rental market. More relevant for a sale.

The renovation budget: how to get three comparable quotes

Renovation quotes in Spain vary enormously between professionals. To compare quotes validly:

• Insist that all the quotes cover exactly the same scope of work (same items, same quality of materials).
• Ask for a breakdown by item (labour costs separate from materials), not just a total price.
• Check that the quote includes waste removal and a final clean.
• Ask explicitly whether the price includes IVA (Spanish VAT) and what kind of invoice they issue (a full invoice with IVA, or cash in hand with no invoice). Working with full invoices is compulsory if you want to deduct the cost of the renovation as an expense in your IRPF.

Related resources: For an analysis of renovation costs by type of work in the Spanish market, the article on renovating a flat to let has the prices item by item. For the BRRR strategy, in which renovation is the central element of value creation, the article on the BRRR strategy in Spain has the full analysis of the renovate-refinance cycle. For post-renovation cash flow and how to check whether the rent difference justifies the investment, the guide to cash flow in property investment sets out the calculation method.