Australians spend billions on home renovations each year. Many do it purely for the love of making their old home brand spanking new. But most of us would like to think that spending hard-earned cash on home renovations makes us wealthier – that our home’s value will increase more than our renovation costs. But will that be true?

The issue splits property experts. Some say there’s no way you’ll get back your money on home renovations. Others say home renos are an easy path to big jumps in wealth. The reality is somewhere in between: making money from your home renovation really depends on how you go about it.  “They (renovations) can add value, but it doesn’t automatically follow,” said David Hallett, Victorian State Manager of building advisory service Archicentre.

There’s no doubt that now is a good time to renovate: the winding back of the first home buyers grant has freed up trades people. The big costs incurred when you buy and sell your home, including stamp duty and moving costs, can all add up to $50,000 in some states. Why not spend that instead on upgrading your existing home?

Danger: avoid spending too much

But before you decide to go ahead with that new bathroom or designer kitchen a word of warning: be careful with how much you spend. “People tend to spend too much on renovations,” said Gary Pemmelaar, a developer, builder, civil engineer and owner of Raine & Horne Glenelg. “They use marble for kitchen tops and for bathrooms they get expensive stuff. You’ve got to be quite careful.”

If you’re hoping to profit from renovations there’s one thing you have to avoid – overcapitalization. It’s where home owners spend so much on renovations there’s no chance of recouping the costs when selling later. The maths is simple: if a home is worth $500,000 and you spend $100,000 on renovations, but you can only sell the house for $550,000 you’ve wasted $50,000.

Hallett says renovations can add value if done properly. “You can do a bad renovation – you can even go backwards if you really go about it the wrong way,” he said. “But if it’s well designed and you build it well and look after it, it will make you money. The key is to do it properly.”

Many will ask: what if I’m doing renovations for the love of it and to create the perfect home? That’s fine, but don’t fool yourself when it comes to sale time when your house isn’t worth as much as you expected after all those additions.

The key steps to profitable renovations

Stephen Tolle, a high-profile professional renovator who has renovated 36 homes reaping an average profit of $300,000 to $400,000 on each, believes home owners should always focus on whether their renovations are profitable – before they begin to renovate. “Otherwise you’re a high chance of throwing money in the bin,” he said.

So how can you tell if a renovation will add value? Tolle says there are three key things renovators should know before they start that first brushstroke, or begin ripping up that old bathroom:
1. The value of the property before renovations
2. Total renovation costs - exactly
3. How much you can sell the property for after renovations … exactly

The last one – knowing to whom and for how much you can sell your property – will require lots of leg work and research. But it’s the key to avoiding spending too much.
If you don’t know the answer you could find yourself spending $200,000 on fancy additions to a $400,000 home. But if houses rarely sell above $500,000 in that suburb, it’s going to be almost impossible to get your renovation costs back.

Tolle says knowing how much you can sell your property for is really about knowing your suburb, including details such as demographics. When you know that, you can then tailor your renovations to fit that particular market.

Five steps to profitable renovations

1. Budget all your renovation costs closely
2. Work out how much your house will sell for after completion (completion worth – existing worth = value added)
3. Reduce renovation costs if they’re more than value added
4. Target renovations to suit your suburb and its demographics
5. Do quality renovation work

 

Do your research! 

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Tags: Price, Renovate

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