Smart spending: how to renovate without over-capitalising

Millions of Australians undertake renovations each year to enhance their homes, or to turn a profit upon sale.

The challenge is to ensure you invest smartly in improvements that add commensurate value to the dwelling in question.

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Over the next five years, property owners will spend a whopping $8 billion a year on alterations and additions, according to a forecast from Master Builders Australia.

Buyers’ agent, author of The insider’s guide to renovating for profit and EPS Property Search founder, Patrick Bright, says most will let themselves down financially by over- or under-capitalising.

He estimates only 20 per cent of renovators gets the balance right. Here are his tips for being one of them:

Start with the end in mind

Begin your project by determining the price a property is likely to fetch, fully renovated. From there, it’s a matter of working backwards to determine whether the acquisition price plus improvements add up to a lesser sum. If they don’t, then you’re about to embark on an overcapitalisation exercise.

“There needs to be a reasonable margin in there,” Bright says. “Too many people look at a property and think they can renovate and sell it without really running the numbers first.”

Big picture planning

Overcapitalisation can be the result of one or two big budget blow-outs – the infinity pool that costs almost as much as the house, or the $100,000 marble kitchen in an unremarkable suburban semi. More often though, it’s the result of a series of silly decisions.

“Typically, people try to keep a certain level of quality throughout,” Bright says.

“If they overspend in the first room, it can be hard to stop because cutting back would make the next part of the property look shabby.”

Planning and budgeting for the entire project at the outset, even if you intend to complete it in stages, will prevent this occurring.

Consider your timeframe

Timing and timeframes are both key factors in the renovation equation. If you plan to spend a couple of decades in a home, then go for broke with structural alterations and premium fittings, provided you can afford them.

Conversely, if you’re likely to move on two or three years hence, it may be harder to get your money back on a big budget reno unless the market has boomed in the interim.

“Someone else will likely pick up a bargain that’s beautifully equipped,” Bright says.

Pay for advice

A realistic estimate of renovation costs at the outset can help prevent overspending and overcapitalisation. Consider paying for it, Bright suggests.

“Too many people call someone in and try to get free advice on additions; often they get a flippant answer because builders don’t want to waste their time.

“It’s worth spending a few hundred dollars to have a professional give you a thoughtful costing you can rely on.”

Spending too little is false economy, too

Try to do too much on the cheap and you’ll pay for it too, Bright warns.

Undercapitalisation can be just as bad for the bottom line as blowing too much dough on everything that opens and shuts.

“You need to choose fixtures and fittings – the kitchen, the bathrooms, the floor coverings – that are in line with the market value of the property,” Bright says.

“People will discount the value of alterations if they’re not up to the standard they expect.”

 

 

 

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