“You see properties all the time that have undercapitalised on the location”
“Anyone renovating has to think of themselves as a property developer – if just for a moment – because you’re playing with large chunks of money”
The ongoing home renovation trend is unescapable. Investors are withdrawing from the property market and are instead keeping their finger in the pie by investing tax-free in their own homes. First and second homebuyers are snapping up run-down properties and fixing them up to make them more liveable or suitable for eventual resale. Others have no desire to sell and instead see the option of renovating as the perfect opportunity to make their dream home a reality – with scant regard form what may currently be desirable on the market.
Before you take the plunge, however, you should take the time to consider your long-term goals. If you’re hoping to re-sell and add genuine value to your home, which renovations or home improvements provide a solid return on investment (ROI)? Are there any that don’t provide good ROI? And what are the best ways to finance such projects?
Measure your options
According to the Real Estate Institute of NSW, the total cost of buying a new house – including expenses such as stamp duty and agent and legal fees – can reach a hefty $20,000 or more. Faced with the need for an extra room or new bathroom, many homeowners are taking the option of adapting or updating their current dwelling to meet their needs instead.
The renovation option also has other incentives. Unlike with investment properties, putting money into your own home incurs no GST, capital gains or land taxes.
On the negative side, there is a danger of overcapitalising your home. Housing Industry Association figures suggest that the average ground floor extension will cost $110,000, while a second floor addition will cost $129,000. With such large sums of money it’s easy to spend too much money on areas that will not provide a good ROI.
Conversely, there is also the danger of undercapitalising your home. In other words, living in a salubrious area and undertaking a cut-price renovation that does not fit in well with the surrounding properties. “You see properties all the time that have undercapitalised on the location,” says David Hallet, state manager, Archicentre Victoria. “If you’re in a nice neighbourhood in a good street surrounded by comfortable family homes, then people looking in that market aren’t going to be impressed by a cheap and cheerful renovation – they’re looking for something bigger and better.”
Planning is the key
Hallet recommends drawing up a master plan before commencing any work. This will outline where things will be located, what you’d like to change and also include a preliminary budget. There’s no need to get detailed drawings or permits yet; it’s just a way of getting some idea of what lies ahead. “The last thing you want to find in a couple of years when you’re ready to do more work is that the kitchen or bathroom requires demolition after you’ve just spent $10-20,000 on it,” says Hallet. “If the kitchen is a priority, then at least tackle it as part of a grand plan.”
The next question to ask is whether the work will be done by yourself as an owner-builder, or if professionals should be called in. You don’t need qualifications in construction to take on renovations yourself, and some tasks can easily be undertaken by yourself or your family. But the potential for trouble increases along with the complexity of the tasks you’re undertaking.
As an owner-builder you will also likely pay more for contractors and materials than licensed builders, who can buy supplies at trade rates. Many professionals operate on extremely low margins and use their bulk buying power to purchase materials at much cheaper prices – usually 10-20% less than retail. Plus, they don't need to buy or hire their tools.
On the flipside, calling in the professionals can be an expensive and exasperating process. Before taking on a builder, obtain quotes from at least three reputable licensed builders and ask to be shown examples of past work. Also check that the final contract has a timing schedule and a guarantee of quality included. Most tradesmen will charge from $30 to $50 per hour for a job involving continuous work over several days; smaller jobs may attract a higher rate.
When looking at ROI on renovations, it’s important to have some idea of both the timeframe you have and the amount of money you’re prepared to spend. “If you’re looking to renovate and sell in the space of a year, then you probably will overcapitalise because you won’t get your money back,” says Hallet. “But if you’re looking at 5-10 years it’s difficult to overcapitalise. Just look at the last 5-10 years to see how property prices have increased.” With careful budgeting and planning, here’s some tips on renovations that usually generate a good ROI:
New kitchens and bathrooms: A perennial winner, as traditionally these are areas of focus for homebuyers. “These are often the sorts of jobs that buyers don’t want to do,” says James Levy, sales associate, Century 21 Cordeau Marshall. A kitchen makeover can range from $6000 up to $35,000 depending on materials and fixtures. Levy notes that while such renovations can be expensive they create a ‘wow factor’ and increase buyers’ desire to buy, driving up the sale price.
Outdoor living areas: This is a growing trend nationally, allowing people to live the indoor/outdoor lifestyle promoted on all those slick real estate ads in local newspapers. Enhancing outdoor living space can be as easy as constructing French doors and opening up the back of a house.
Home offices: Given the shifts in work practices and the focus on work/life balance, it’s no surprise to find growing importance placed on home offices. A relatively cheap option – provided you have the space available – this can be as easy as transforming an existing spare room.
Room additions: Popular changes to living areas include the addition of dual entry ensuite and walk in wardrobe to the master bedroom. If additional space needs to be added on, expect to pay up to a hefty $50,000. Conversions of existing space will cost less, around $10,000. Kids’ rumpus rooms are also popular.
Garden design: The trend in garden design is the addition of light wells and courtyards around the home, an inexpensive way of bringing views to bedrooms and living areas.
Sustainable design: Also gaining momentum is the move towards sustainable design. “Sustainable design and things like water tanks are being planned into renovations much more than even a year or two ago,” says Hallet.
Remember, what works for you may not work for anyone else. “The renovations which turn buyers off are ones where the colours or materials used are way off the norm,” says Levy. “For instance a pink kitchen - we had a house where a new kitchen was put in and it was musk pink. Buyers were not willing to pay for a new kitchen, and when making offers they factored in putting a new one in - clearly actually devaluing the house. It’s important to be neutral in colour choice for walls and carpet so as to appeal to as many buyer groups. Feature walls can add colour if needed.” Other tips include the following:
Home theatres are popular, but check that your neighbourhood is one that will sustain such an extravagance. A home theatre room in a run-down block of flats is unlikely to be appreciated by future buyers.
Buyers are also now wary of distinct dining areas. The days of three separate eating areas – a meals area, dining area and breakfast bar – are long gone.
Be wary of saunas, wine cellars, children’s play equipment and expensive light fittings and window furnishings.
Temporary property developer
With careful planning and budgeting, and an awareness of the sorts of additions/improvements likely to add value to your property, it is possible to make good money out of renovations. Hallet concludes: “Anyone renovating has to think of themselves as a property developer – if just for a moment – because you’re playing with large chunks of money.”