Monday, January 25, 2010

4 things to know about renovation

As I shake the gyprock dust out of my hair and splutter my way through an apartment renovation, I've been thinking about whether it's truly possible to "add value" by spending money to renovate property.
I realise that businesses and companies can add value to their bottom line by investing in certain items - for example, buying new machinery can increase output and make more profits for business - but I'm not so sure the same principle applies to residential properties. Especially when it comes to renovating.
The real reason I'm starting to doubt whether renovating adds value is because I realise how bankrupt-inducing a renovation is, even when you know experts, get cheap deals and co-ordinate it well.
There are plenty of supposed property gurus out there that will tell you renovating can add hundreds of thousands of dollars to a house if you know certain "secrets" ... (and these secrets usually cost a pretty penny to read about). It's bunkum.
Here's what you really need to know about "adding value" by renovating:
Yes it's true that spending money on certain renovations can make a property either sell or rent for a higher amount than if that money had never been spent in the first place. But the real trick is to keep reno costs so low and the impact of that spend so great that it will make a property worth more money. This ain't as easy as many experts believe. And the truth is that low-cost home improvements like landscaping, repainting and decluttering will probably add as much value to a sale price as spending $30,000 on a new kitchen.
This is a rule of thumb I have gathered over my years of property watching. I've seen plenty of derelict houses that have been stunningly renovated sell for $1 million more when they go back on the market after a gorgeous architectural renovation. But the fact is that those derelict properties were worth well over $1 million to purchase and then had a $500,000 renovation, plus one-year of holding costs (with the owner or developer or "flipper" paying interest on a mortgage and renovation costs) plus stamp duty and then agent fees to pay as well. So the $500,000 renovation cost (which, believe me, is not abnormal in Sydney and Melbourne's best suburbs) on a $1.2 million house that can then sell for $2 million is not really as "value-adding" as people are led to believe. But whether you want to renovate a $300,000 apartment or a $3 million beach house, sticking to the 5% rule means you are less likely to overcapitalise on a renovation and be able to recoup your costs when you go to sell.
Back in the days when Jamie Durie was on every telly renovation program and we watched unsuspecting suburbanites spend $10,000 on a cheap kitchen makeover to magically sell their property for $50,000 above the real estate agent's original price expectations, many Australians believed in the power of renovation. What they forgot was that the market was booming and that price may well have been achieved without a kitchen upgrade. Many real estate agents, such as L.J. Hooker's Poh Ling Ee, say unrenovated properties fetch similar prices to renovated properties - and in some cases, people pay a premium for an unrenovated property simply to "dream" about how they might renovate it.
People who plan to live in a house for 10 years or more don't need to worry about spending more on their renovation than they can immediately recoup on a sale. And that's because a $150,000 renovation of a $500,000 family home will add lifestyle value that can't be measured by dollars and cents. What price do you put on a working mother having a kitchen that's easy to whip up a quick meal for the family if she's tired? What price can you put on having a swimming pool to entertain the kids rather than have to pay to take them to the movies? It's really only investors or people who don't want to live in a property for a long time that need to obsess about the dollars and sense of adding value to a property. After all, a property is a home to live in, love in and hopefully not leave.

Related stories:
12 ways to save while renovating
Choosing the right property to renovate
Safe asbestos removal

Pictures: LivingETC

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