Why renovate? That’s the question that we are trying to answer today!
Many homeowners and investors renovate their properties with the objective of adding value and maximising their return, either in the form of a higher sales price for a residential property, or a higher rental income for an investment property. However, many Australian homeowners are also renovating their properties to better suit their lifestyles or to upgrade outdated fittings to reflect more modern designs and trends.
The objective and the desired end result for your renovation will influence your budget, timeframe and renovation choices.
Increase property value
A well-designed renovation can add significant value to your property. The return on your investment will largely depend on the property type and location, as well as the scale and type of renovation itself.
It is estimated that a major renovation can add up to 10% of the value of your home, particularly if you hold on to the property for at least 5 years. For example, if your property is valued at $500,000 and you spend $25,000 on your renovation, you potentially make over $50,000- twice your initial investment.
You should speak with local real estate agents, a conveyancer as well as your existing lender to get an idea of how much value your planned renovation could potentially add to your property.
Maximise sale price
If you plan on selling your property in the future, a carefully planned renovation can help boost the property sales price. Keep in mind that if you’re renovating to sell, rather than renovating to live, you should take steps to ensure that any changes you make will appeal to a wide pool of potential buyers.
Investment property profit
By adding value to your investment property, you can charge a higher rental amount which yields greater profitability. As an investor, you can also benefit from depreciation and tax deductions which may help you generate wealth and diversify your portfolio.
Whether it’s a growing family, a home office or a retirement lifestyle, you may need to reconfigure the layout of your home, or create more space throughout. This could involve undertaking a major structural renovation to add new rooms, an additional bathroom or a guest room to leverage the available space.
From real estate agent fees to stamp duty to conveyancing charges, the costs involved in selling and purchasing a new property can be exorbitant. Generally (and depending on the scale of the project), renovating or upgrading your existing home is a cheaper alternative.
Should I renovate?
- Increase property value and generate profitability
- Improve standard of living
- Expand existing space
- Substitute outdated fixtures and appliances for better quality ones that will provide greater durability and a modern appeal
- Save money by renovating instead of relocating
- Potential to overcapitalise
- Time, financial and emotional stress (and resources) required to complete renovation
- Inconvenience of living through renovation or moving temporarily
AVERAGE RENOVATION COSTS
For a major renovation project, including the renovation of; a kitchen (10 sqm), main bathroom (5 sqm), master bedroom (8 sqm), a second bedroom (6 sqm), laundry (4 sqm), patio (8 sqm), ensuite (5 sqm), study (6 sqm) and dining room (7 sqm), the costs are as follows, depending on whether you go for a budget, typical or luxury build
|Budget Cost||Average Cost||Luxury Cost|
Source: Home Design Directory (2015)
How to prepare for a home renovation
To avoid budget or timeline issues, you should plan carefully for your renovation prior to commencing the project.
Set renovation objectives
Before you begin the project, ensure that you set realistic objectives for all the things you’d like to achieve during the renovation. To facilitate your planning and budgeting, it’s a good idea to separate the big ticket items form the luxury items to ensure that you stay on track (and within your means).
If you’re contemplating major renovation, you may want to consider planning the renovation in stages. For instance, you might want to upgrade your bathroom but then wait a couple of months before renovating your kitchen area. Staging your project can give you the time you need to get your finances back in order which also provides you with a “breather” in between major stages to re-focus on the next section of the project.
Assess your property
Before you commence your renovation, arrange for a home inspection to identify if there are any structural problems. This will help determine any hazards or problems from the outset, rather than creating stress and hassles if you discover them halfway through the renovation.
It’s a good idea to get your property appraised by a conveyancer to determine its value as well as the projected value once the renovation is completed. You should also speak with local real estate agents to see if they have any further recommendations about how you can boost your property value for the specific location and market.
Check with your local council and authority to ensure that your renovation meets regulations and guidelines.
If you live in a unit or apartment, you’ll also need to liaise with your strata manager or body corporate to see if your plans will be approved.
Your home renovation must meet basic requirements for health, safety and structural soundness as stipulated by the Building Code of Australia. The permit process also ensures that your plans are in accordance with local government requirements such as planning and environmental regulations.
Set project budget
At the costing stage, you should break down your individual costs for each part of the renovation. For instance, if you’re planning to tile a wet area, you should separate the costs for each separate task (e.g. waterproofing, tiles, labour) as this will help you keep tabs on your expenditure.
Once you’ve broken down your costs, you’ll need to estimate your renovation expenses. Ensure that you source quotes from at least three different professionals for each major task to ensure that you get the best deal. Consider all the trade services you’ll need including building inspectors, architects, engineers, builders and other specialised tradesmen such as plumbers and electricians.
As a rule of thumb, you shouldn’t spend more than 5% of the property purchase price on a renovation project, though this may vary depending on your individual circumstances.
It’s crucial that you allow for hidden costs such as council fees and allow for a contingency buffer of at least 10-20% of your budget so you’re prepared for any unexpected costs that may come up.
The building contract defines the agreement between you and the builder and outlines the responsibilities of both parties.
Some of the elements which should be covered in the renovation contract include:
- Scope of work: This will include a description of the works to be carried out by the builder, as well as the work which will be carried out by independent parties.
- Timeframe: The contract should identify the start and completion dates for the project and include a statement saying that the builder is not responsible for delays for circumstances beyond their control.
- Payment terms: This should determine the total amount of the contract as well as the payment schedule and identify how taxes will be treated.
- Variations: Once the renovation is underway, any variations or changes to the work must be drafted as a variation document and signed by both parties.
- Warranty insurance: Builders must obtain a policy of homeowners’ warranty insurance before beginning the renovation. This policy covers you for defective works and non-completion works. It is also important that your builder takes out public liability insurance as a precaution.
- What if I need to make variations to the works? Although you may have planned your renovation carefully, chances are you may make some changes to the original plan. Licensed builders will be accommodating of any changes or additions you want to make throughout the project, but before you make any changes make sure you consult your builder.
Should I still live in my home during the renovation?
Some renovation projects can be really restrictive and make life difficult while they’re in progress. However, whether or not you live through your renovation is completely up to you. For small-scale renovations, it may not be necessary to move out during the project whereas, for major renovations, it may be appealing to move out. Keep in mind that this will probably be more expensive.
Terry, your friendly mortgage broker