Renovating for a profit - stop kidding yourself!  

by Pool Builders on 07-02-2007 in Articles

One of the greatest lies people tell themselves is that they are renovating their own home to add value to it and thereby making it a viable investment vehicle. Instead, they are renovating to incorporate their personal lifestyle and their own tastes. There is absolutely nothing wrong with renovating your home to meet your needs. Everything you do doesn't have to be a good investment decision; If you have no intention of selling your home and want to make it comfortable and truly 'home', building the big marble columns on the porch, with the statues of Zeus and Aphrodite in the front yard is fine.

The problems arise when you want to renovate with the intention of adding value to the property and then selling it for a profit. A common trap for renovators these days is spending too much on the wrong things. Owners can pour big money into expensive fixtures, the highest-quality floor tiles or a swimming pool and add nothing to the value of the house. It's not uncommon for renovators to lose $100,000 over-capitalising on renovations by spending $250,000 but the value of the property goes up only $150,000.

If your current home is not practical any longer, deciding on whether to renovate or move, is the choice. People need to consider how much they're entrenched in their current suburb (kids' schools, community groups, etc) and contemplate the cost of moving. The average cost of selling and relocating is $50,000.

Those who decide to refurbish need to assess whether the home is suitable for renovation. Not every home is a candidate. Old weatherboard homes are generally not as suitable for first-floor extensions as brick homes would be. With a weatherboard home, it's better to extend at ground floor level.

Property owners need to assess the current value of the home and its potential value after a makeover. They should consult valuers to assess their home as a finished product. You can get a feeling of it yourself - First, add what was paid for the home to the cost of the planned renovation - then compare the sale prices of similar finished products in the area. Anyone planning to create a four-bedroom, two-bathroom home should examine existing homes of that type on similar-sized blocks. If there are no comparable homes in your area, then you should strongly resist construction 'the best house' in the suburb as the value of it will not be reflected in the sale price.

Tips:

It's dangerous to start a project without a firm budget, which can result in an unfinished project or unexpected borrowing which cuts the investment potential dramatically.

Renovators who don't seek competitive tenders from reputable builders can end up paying 50% to 100% more than they need to. For reputable builders refer to the Master Builders Association on http://www.mbav.com.au

Home owners then need to get a proper contract in place, one that deals effectively with changes that arise during construction. i.e Knowing that variations are inevitable, you need to have a method to realistically calculate a fair price for those variations. E.g. They may strike rock during excavations or find termites or faulty wiring or plumbing that's not up to scratch.

Pools are a big trap. Perhaps the most common disappointment for renovators is spending big on a swimming pool and finding it hasn't added great value. Pools are lifestyle improvements, not value improvements, and the market is split 50-50 on whether they're desirable or not. Many people dislike the cost and hassle of maintaining pools and resist buying homes with pools if they want to rent them out due to the higher costs of maintenance. In the current environment with water restrictions, pools also lose their appeal.

Be boring

Renovators' biggest mistake is viewing the project as a package into which they put all their favourite things: gold taps, expensive floor tiles, Greek Columns, Chinese lions, or a particular bathroom basin they love.

If home owners hope to add value, they need to consider other people's tastes as well as their own - and understand which features add value and which do not.

Be cautious of renovating to your selective lifestyle and taste. You need to produce a design that is compatible for all tastes by being mainstream - or boring!

It's important to get the external look right, with the extensions matching the existing structure and roof shape, and to achieve an internal layout that makes sense, with rooms of the right size.

There are ways to easily add value. Investors should look for houses that can be re-configured internally rather than extended. i.e. buying a good-sized home and making cosmetic improvements such as painting and new floor coverings. Putting in a functional, but new kitchen and bathroom can also add thousands to the resale value of the home.

One golden rule to renovating:

The value of the building depreciates with time, unlike the value of the land which appreciates. Therefore, if you are renovating to increase the long term value of the property, 'go easy' and do only the basics!

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