Knowing what to spend on renovations, or rather what not to spend, is one of the keys to successful property investing.
Whether the property is your own home or an investment property, the most common goal is to make a profit from the exercise, whether that be now or in the future.
Knowing your end goal will help to identify which of the thousands of possibilities could or should receive attention.
- Is it an investment property or your own home?
- Are you planning to hold the property and add value?
- Are you planning to sell or leverage against the added value to buy another property?
1. Avoid Over Capitalizing - Start with an understanding of values in your area.
A good starting place is to establish the likely sale price or valuation price after the renovation has been completed. This is just an indicative value, look for similar properties in your suburb which have already been renovated on the real estate portals online. You could ask a real estate agent for an opinion on its value before and after renovation, or subscribe to a public property database such as CoreLogic or RPData for suburb statistics.
Using those same information sources establish what the median price for the suburb is and stay within a range of that mark. We’ve all heard the sad story of someone who got too emotional about a property and built or over improved way outside of the area average, then ended up with a White Elephant and being unable to recover the costs when selling. Remember the Golden Oldie, buy the worst house in a great street? Avoid doing the reverse.
Tip: Be sure to compare apples with apples in terms of the number of bedrooms, bathrooms, garaging and land size along with the style and construction materials.
2. Having established a probable value for the property then decide on a range which you will stick to.
Seasoned investors and renovators tend to suggest keeping your renovating budget to around 10% of the current market value of the home. Stick to the lower side of that 10% variable in a suburb with lower demand or add a little more, say 1-2% in a really good suburb. Allow an extra 1-2% if you plan to make any minor structural changes more for additions or extensions. If the property is really run down allow an extra 1% and if it’s in pretty good condition allow a little less. Plus or minus if you are experienced or inexperienced in renovating, or whether you will be doing some of the work yourself or just project managing the trades, remembering labour costs are often the largest cost.
3. Know who your target market is. What do local tenants look for, is that different from what local buyers look for?
If you live locally go to property inspections of competing properties so you can see who they are attracting and how the properties present. Pay attention to other people’s comments during an inspection, this is great market research.
One of our newer property managements recently took a much longer time than average to rent because it was a home targeted to a family area. It was near a good school and day care centre, lots of parks and playgrounds. However, the house had two bathrooms but no bathtub. So many potential tenants walked away with that comment on their lips.
Speak to local real estate agents and property managers to establish what the level of demand is, who the likely client will be and what they are looking for. The type of renovation you might undertake may also be determined by whether the client you are looking for is a tenant or an owner occupier each with their own specific list of desirable features.
E.g. Families with children prefer a bathroom with a bath tub, a fenced yard with room to play, open plan living and nearby parks and playgrounds. Retirees are happy with fewer bedrooms but appreciate ease of access, low maintenance gardens and storage space. Shift workers look for air conditioning and block out window dressings.
If your property falls short in any of these areas, then the first allocation of funds should go to meeting the requirements of the market.
Sometimes a coat of paint and new carpet are enough to meet the likely client’s needs, other times the demographic has completely changed and therefore the standard of housing has also changed. This is especially true in older areas which are now attracting a different demographic. A good example is some of the beach suburbs which originally attracted holiday makers and retirees, and now attract young professional couples.
Example: If your property has 4 bedrooms and one bathroom and the general demand is for 3 bedrooms and two bathrooms, use that as a springboard for your renovation plan and consider converting the 4th bedroom into an ensuite and walk in robe.
4. Once the property is catering for your target market’s needs, the next focus is on the visual appeal and look of the property.
All properties are affected by the impact of street appeal, first impressions truly do count. Have a look from the kerb, can the gardens do with a trim and a little cosmetic attention such as some hardy plants and some bark chip. Are large trees making the house dark and difficult to keep the lawn looking healthy, are they filling gutters or dropping leaves everywhere. Are the letterbox and front door looking shabby or tired, would respraying the roof or fences proved an affordable pick me up?
Internally it is advisable to review the condition and colours of walls, floors, window dressings, lights and fans approximately every 6-8 years. Always try to stick to neutral colours that don’t date and will comfortably match most decorating styles.
5. How much should you allocate to each room or area of your renovation?
Many seasoned investors recommend a particular percentage of allocating funds and then translate that into a $$ budget.
Typically you may allocate 30% to the kitchen and 20% to the bathroom, 20% to the exterior and 30% for general improvements. Now convert those percentages into a dollar value.
Example: If your property is worth $400,000 and you have allocated $40,000 to renovate, then on those percentages, the bathroom gets $8000 and the kitchen gets $12,000 but remember to address the needs of your target market and consider the existing condition room by room.
6. Budget to a plan!
Start with a list for each room and then prioritise the allocation of funds. If you are anything like the rest of us; there are always more things you’d like to do than the funds will allow.
One way to make the budget extend further is to consider what you can retain and work around. You may be able to keep the kitchen carcass, replace the benchtops and appliances and just paint the doors and add new handles. Perhaps someone else’s second hand kitchen from Gumtree or a community page can be upcycled for your project. Have bathrooms re-grouted, add a new shower screen, toilet or vanity and tapware rather than a full re-do.
A full renovation will always add more value but it’s not always affordable as well as increasing the risk of overcapitalising.
If you are doing a full remodel, remember there is always a market for second hand items especially period or character pieces. Things like kitchens, bathtubs, old doors and windows even laundry tubs can be on sold to help cover costs.
7. The dangers of DIY
While the television shows make renovating look easy, and even fun, walking into a poorly executed renovation is far from impressive. Consider which items require a professional’s attention, and depending on your time, availability and skill set identify which tasks you might handle yourself. If the end result is such that people are criticizing the workmanship rather than appreciating the improvements you may just have made the property look like it needs more money spent, completely defeating the purpose.
8. Tax Depreciation Schedule for Improvements on Investment Properties - even older properties
If you are retaining the property as a rental consider having a new Depreciation Schedule prepared so you claim the maximum benefit from your improvements. Most quantity surveyors can give you an idea of whether the improvement you can claim warrant a report being prepared.
9. Adding Value Vs Increasing Return – Where is The Best Bang for Your Buck?
The final consideration comes back to the purpose we began with. Renovating your own home is generally about improving enjoyment and liveability for yourself as well as adding value, or preparing it for sale to achieve a higher price.
Renovating an investment property can also be about increasing its value but will also be geared around increasing the return. Some items carry more bang for your buck in terms of ROI
Items which attract a higher rent can include:
- Up to date kitchens and bathrooms
- Fresh paint, floor coverings and window dressing (Blinds are preferable)
- Air-conditioning and security screens
- Privacy, fencing and outdoor living areas
- Making a property pet friendly
10. Get some good quality photos while the property is looking great.
Once you’ve done all the hard work get a fresh batch of professional photos taken to show the property off in its best light if you plan on advertising it for sale or for rent.
Finally never discount the value of a first impression – buyers and tenants will often drive by a property to check out the presentation and the area long before they make contact with an agent or a property manager to book an inspection.