Adding value with a renovation

A renovation can add to a family’s enjoyment of their 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.

The 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.

Spending more on modifications than the amount those changes add to the home’s ultimate sale price is known as overcapitalising, and it’s something best avoided.

There are ways to minimise the risk of overcapitalising.

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.

Set the scope, 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 the work yourself. Some jobs can be confidently handled by amateurs but you may end up with a sloppy result that detracts from the property’s value. Some tasks such as electrical, plumbing or gas works should be left to qualified 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 have been in some of Australia’s major capital cities for the past few years, rising values can provide a buffer if you over-run on the budget.

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 your lender, adviser or mortgage broker about which options would be most cost effective in your situation.