There are a few things you need to consider before going ahead and making those repairs or cosmetic upgrades to your investment property.
Blogger: Julianna Forsyth, head of Harcourts Complete, Harcourts
While well-planned, cost-effective renovations can certainly add value to a property, there is always the risk of over-capitalising. That’s why it pays to look into the types of renovations that really add value to your investment and appeal to potential buyers.
Remember, renovating for your own personal use and renovating to attract a wide range of potential buyers can really be two different things. It all comes down to your return on investment or ROI. Basically, you’ll want to ensure the amount you invest in the renovation is less than the value you’re adding to the property, and the sale price you’re likely to achieve.
Here are a few situations where I wouldn’t recommend renovating if you’re looking to maximise your sale price.
If margins are thin
If your property isn’t in desperate need of repair, and you’re confident you have quite a bit of equity existing in the property, then renovations may not be necessary. Especially if after crunching the numbers, you’re not confident you would be increasing the sale price by that much, and remember a return on investment can never be guaranteed.
If you need to sell quickly
Renovations take time, both to plan and budget for as well as to be completed. So if you’re looking to sell in the near future, renovations may simply not be possible. Remember that renovations often go over budget and can take longer than first anticipated, so factor both these considerations into your decision.
If the renovation will personalise the property too much
Some renovations appeal to most buyers, like upgrading kitchens and bathrooms, but others can be quite personal to your taste and style and therefore won’t appeal to the largest number of potential buyers and should be avoided.
This can include adding extensions like granny flats, converting bedrooms into specific-purpose rooms like a media room or library, and separating rooms by adding additional internal walls.
If the renovations will cost more than 10 per cent of the property’s value
A general rule of thumb when it comes to renovating a property for profit, is to spend no more than 10 per cent of the property’s value on the renovations. So the first step would be to ensure you have an up-to-date valuation of the property, performed by a professional. The next step would be to work out a budget, and ensure you add a buffer in case of unforeseen additional expenses. Using the 10 per cent rule, this means a home valued at $500,000 would have a total renovation budget of $50,000. Any more than this, and you risk over-capitalising.
If the renovations won’t suit your target market
This is why doing your research is key. What is the demographic of your property’s neighbourhood? Mostly singles and couples? Mostly retirees or mostly families? Finding out who the neighbourhood is likely to attract will help you determine suitable renovations.
For instance, if your local market is likely to attract families, think carefully before adding stylish but potentially hazardous staircases, or ornate glass features.
Ask if you’re unsure
When planning a renovation, don’t shy away from asking your local real estate sales consultant their opinion on the condition of the property, the type of buyer the home is likely to attract and any renovations they would recommend. You may be surprised, if the property isn't in need of massive renovations your sales consultant will tell you and you may save yourself a lot of hassle, time and money.