3 ways to add value to a renovation without overcapitalising
Added on by Etairos Accounting
A renovation can add to the enjoyment of your home and to the property's value but it can be difficult to decide how much to invest in an upgrade.
There are various schools of thought on how much to spend. Most expert suggestions are based on a percentage of the home's starting value – commonly up to 5 or 10%, but there are many variables to consider such as the scope of the work.
Your home's final value will be constrained by factors including its location and the amount of land it sits on as well as the house or unit itself, so bear that in mind when planning your project. There's always a risk that if you spend too much you won't be able to recoup the costs when you come to sell the property.
This is called Overcapitalising: spending more on inprovements than the amount those changes will add to your home's value is something that's often best avoided.
But there are ways to minimise the risk of overcapitalising.
1. Do your research
Unless you've recently purchased and have a clear idea of your home's price in its existing condition, it can be helpful to obtain a valuation to help guide your spending decisions. You probably have a wish list in mind for your renovations: an extra bedroom; an update to the bathroom or kitchen; a deck in the backyard. Ask the valuer's opinion on how proposed modifications might affect the property's value.
You could also look at similar homes for sale in your neighbourhood and talk to real estate agents to assess the types of improvements that add to – or detract from – their value.
2. Set the scope and make a budget
Arm yourself with basic information on what works in your local area, then critically review your plans. Get estimates for the proposed work and set a budget you can stick to. Be realistic about the costs.
It can be tempting to reduce expenses by cutting corners and doing some of the work yourself. Some jobs can be confidently handled by an amateur home handy-person but unless you're confident of your ability you may end up with a result that detracts from the overall quality of the work and your property's value. Tasks such as electrical, plumbing or gas works must be left to qualified, licensed tradesmen.
If the changes you have in mind look likely to result in overcapitalising, think hard about how much they will improve your lifestyle before you commit. Overcapitalising may be less of a concern if you intend to live in your home for the long term as you'll have more time for the property price to catch up to what you spent on the renovation.
Similarly, when property markets are buoyant, as they are now, rising values can provide a buffer if you over-run on the budget.
3. Figure out the finances
The way you finance your renovations will have implications for the overall cost. Unless you have savings available, you'll probably need to borrow.You may be able to redraw from your mortgage if you're ahead on repayments. A line-of-credit facility, which allows you to draw down only the amount you need up to a set limit, might also be suitable. These help to save on interest as charges accrue only on the amount that has been drawn down.
Talk to Etairos Finance today about which options would be most cost effective in your situation.
(source: Macquarie Bank: Mortgage Insight, October 2015)
