Renovating for Profit: Myth or Reality?

By Alex Brooks

Renovating is no easy task, even in a strong and vibrant property market. All these “renovate-for-profit” and “renovation magic” promises that seminar spruikers espouse in a market when property prices are clearly falling make me mad. Angry, even.

These “secrets” are not worth the hundreds of dollars most of these seminar spruikers are trying to charge you. I even saw one author trying to charge a thousand dollars for an entire kit of renovating for profit secrets. My advice is to save your bucks and put it into a few tins of paint for your own property.

This bizarre notion of being able to renovate and make money instantly is a dream for the vast majority of home-owners, especially those who have taken on relatively large mortgages in the last five years.

Renovating and making money is not easy AT ALL and most people will actually overcapitalise to renovate their own house. In fact, it’s worth it to overcapitalise in the short term to create a home you will enjoy for the long term. It’s also worth it to over-capitalise in premium, blue ribbon suburbs where a 5 per cent increase in property value is actually several hundred thousand dollars! It’s hard to overcapitalise when renovating a $3 million house!

Most of us don’t own homes worth that much money, and plenty of renovators dupe themselves into thinking they are “adding value” merely by putting in a new kitchen. But if they take into account their time, holding costs, buy-and-sell costs, then it’s highly UNlikely they come out with a massive profit they can stick in their back pocket.

My very random guesstimation is that less than 10 per cent of renovations to standard residential homes actually add value to the property. In a market with volatile property prices, it’s even harder. Notice how few Property Ladder and The Block style telly shows are on the box at the moment? That’s because the market has soured and it’s virtually impossible to spend money on a house without the risk of eroding your equity.

Which is not to say renovation isn’t worth bothering with. In fact, it’s more important than ever to plan a renovation. Constantly plan it, in fact. There’s no point spending $800 painting the kitchen if you plan on ripping that kitchen out next year!

But how can you make sure you won’t be dudded into overcapitalising if you do want to inject a bit of renovation love into your home? Here are some of my hints:

1. Focus that budget

Renovations that recoup their costs will be difficult in a property market where house prices are stagnant or even falling. That means you must make your renovation dollar work hard. Guard your reno budget closely - a dollar saved is a dollar earned! Work out the exact scope of how much you can spend on a house without eroding any equity if the market fell by, say, 5 per cent. This makes your budget necessarily tight, but extremely focussed on achieving a value-add.

2. Plan, plan and plan again

Unless you are a professional property expert or design whiz, renovating on the cheap is a tough ask. That’s why the very best investment most of us can make if we wish to renovate is to really plan and think about what we need to achieve. While the renovation is in full force, it’s too easy to start changing your mind, increasing the scope of the job or wanting the Taj Mahal (while you have the budget for a caravan) and blowing out your costs.

Understanding the scope of your design brief, what you want your home to be and the form and function of every room in your home is the BEST possible way to invest your time. Just like a business, a renovation needs a plan. A plan that incorporates objectives (financial, emotional or even design-related) and strategies to get you to the end goal.

I always think it’s a good idea to start by writing down everything you can see and touch as you walk up to the front door and enter the home. First impressions count, and when renovating, it’s those first impressions that create the perception value of a house. For example, a nicely painted front door and new doormat is way more appealing than a manky finger-printed door with kickmarks and a ratty old door mat. Some homes can actually be improved massively with a “first impression” renovation which involves only a weekend and a $200 trip to a fancy homewares store. Fixing up the letterbox, exterior paint; windows and curtains; garden and landscaping, front door; welcome mat; doorbell; hallway and any pongy smells when walking in work wonders to improve perceived value.

3. Spend to add perceived value

A beautiful home or apartment is all about perception and emotion. And renovating to add value is all about creating perceived value in excess of the actual cost. As property prices shift and change, so too do perceptions of “value” - homes on busy roads or less-than-great streets tend to be discounted harder. A renovator with a slightly sub-par home needs to create even stronger perceptions with their work than someone that already owns a well-located home.

Renovating to create things like:

- more floorspace

- better layout or landscaping

- extra off-street carparking

are all great ways to add value in theory. But I can’t emphasise how important it is to do solid research into your local area’ s property market to really understand the “money spinners” that work in your real estate market. So plan, plan, plan before you spend, spend, spend.

4. Can the renovation pay back in other ways?

Overhauling the kitchen and bathroom is one of the easiest ways to bring a home up to date and improve its perceived value - but that won’t necessarily increase its dollar value.. Repainting and renewing floor coverings are also great value-adds. It’s important to go mid-range on things like light fixtures, curtains and landscaping. And don’t think that you can just buy cheapo stuff from the hardware store to stick to your budget - you’ll only erode any perceived value when those tacky fixtures and fittings scream “cheap cheap” at any potential buyer. Even more importantly, spend where you will most enjoy. If you love cooking, then does it really matter if you overcapitalise on the kitchen? If it gives you pleasure every day and saves you time, then that renovation will pay you back in other ways. And isn’t that the whole point? Shouldn’t we all be trying to enjoy our homes, rather than merely profit from them?

Source: www.propertybooks.com.au