Before you spend a cent on a renovation, it’s important to do your research.
Perhaps because of our passion for home-renovation shows, last year we spent a record $9.826 billion on renovations, according to the Australian Bureau of Statistics.1
The problem is, while there’s been a long-held assumption that residential property prices usually go up, currently there’s reason to be cautious.
Moody’s Analytics predicts that house prices in 2019 will fall in: Melbourne (down 11.4 per cent), Sydney (down 9.3 per cent), Perth (down 7.7 per cent), Darwin (down 2.7 per cent) and Brisbane (down 0.6 per cent). It’s a brighter outlook in Hobart (up 4 per cent), Canberra (up 3.2 per cent) and Adelaide (up 1 per cent).2
Adrian Kelly, president of the Australian Real Estate Institute, says: “How much to spend on a renovation is a complex issue because property-price gains or falls differ throughout Australia.”
There are some strict rules, however, to avoid overcapitalising, ie when the cost of renovations outweighs how much value it will add to a property, over and above what you paid for the home.
Making money in the property market is, to some extent, educated gambling.
Buy low, sell high
Making money in the property market is, to some extent, educated gambling, says Jason Andrew, CEO, Ray White NSW.
To improve the odds, it’s crucial to do your research on sale prices in neighbourhoods you want to buy in.
You can use a site such as www.onthehouse.com.au to view properties within the area and see estimated values, land sizes, sale history and what’s on the market. Attending inspections and auctions is also invaluable.
Crunch the numbers
While figures of five to 10 per cent of the purchase price are often bandied about in the media as a sensible amount to spend on renovation, both Kelly and Andrew say ratios can be misleading because there are so many variables – purchase price, neighbourhood booms or crashes, and more.
To get an idea of your renovation budget, author of HomeSpace, Darren Palmer (from television’s The Block), suggests looking at properties like yours in your area that have sold for the highest price.
Ask yourself what those properties have that yours don’t – an extra bedroom or a designer kitchen, for example.
If you take the price of an expensive comparison home, or several, and deduct the current value of your home, you will get a basic guide for how much you can afford to spend, says Palmer. If you want to make a profit you need to spend less.3
Finding out the highest prices in your neighbourhood will also tell you what the ceiling value of your neighbourhood is, or what buyers and renters are willing to pay to move in, advises Kelly.
Enjoyment of your own home is a factor in renovating a property. It’s more about good times shared than a very restricted budget.
Investment property versus home
Spending money on a home you are living in, or will live in, is a completely different proposition to spending on an investment property, says Andrew.
Andrew also thinks an investor who is looking to renovate their property before renting it out might invest in simple updates such as a new bench top, oven, window furnishings or carpet.
A home-owner, on the other hand, might want to splurge a little more on an outdoor entertaining area or a luxurious bathroom, he says.
“Enjoyment of your own home is a factor in renovating a property,” says Andrew. “It’s more about good times shared than a very restricted budget.” That said, he believes you still need to watch expenditure unless you are certain you will never sell or you lose money.
What to spend your money on
While you might choose to add a swimming pool or a lush garden, these are not sure-fire sellers because most purchasers don’t have time for the upkeep, says Kelly.
That changes if you buy in an area where people are wealthy enough to pay someone else to do the work.
Kelly also warns that a new kitchen and bathroom will only make a property more attractive if they are to the buyer’s taste.
Conversely, he says he has always found properties that have a second bathroom to be more popular than houses with one, while a second living room or fourth bedroom is also appealing.
Says Andrew: “The idea that a good kitchen and bathroom will sell a property hasn’t necessarily changed. But multiple living areas, especially an indoor/outdoor entertaining area, sell property now.”
Think about going green
Sustainable features such as solar panels or recycled-water systems might be worth figuring into your renovation.
A 2018 study by PRD Nationwide4 found sustainable buildings outperformed their conventional competitors in all relevant areas — environmentally, socially and financially. The study says these features contribute to the price of the property and decrease the time taken to sell. The median house prices of properties with sustainability features were found to be at least 10 per cent higher than properties without recorded sustainability features.
Get advice from a real estate agent
A reputable real estate agent should be able to offer guidance on both house prices and renovation spend, says Kelly.
For average renovation costs, go to: https://hipages.com.au/article/renovation_guide_how_much_does_it_cost_to_renovate
A word to the wise
While renovating can be an exciting project to look forward to, it also comes with potential pitfalls, so it’s a good idea to look before you leap. For peace of mind, talk to your financial adviser.
1 Australian Bureau of Statistics, Australian National Accounts: National Income, Expenditure and Product, Dec 2018
2 ABC News, House prices set to fall another 10pc before 2020 rebound, Moody’s Analytics says, Apr 2019
3 Domain, How much should you spend on your renovation? Darren Palmer shares his advice, Jul 2018
4 PRD Nationwide, Your Green Guide – Residential Real Estate 2018
This article was originally published by Colonial First State https://www3.colonialfirststate.com.au/personal/guidance/lifestyle/how-to-avoid-overcapitalising-your-home-or-residential-property.html