Australians love investing in a residential property with a view to profiting from improving it. Some fork out their life savings and stretch their loan capacity without doing much homework on what opportunities there actually are to improve the property. A property investor should assess the home improvement potential before they invest. Many do not know where to start even after they have taken possession.
This article is the second part of the Improving Property Value Series, and should help you consider what opportunities are available to you before you dive in.
Boosting home value can be a costly exercise
When there is a limited budget, you cannot possibly improve everything. So decisions have to be made about which is the most fruitful path to take. However, do not dwell on decisions too long as sometimes the worst path is to procrastinate. A new homeowner that takes months to decide whether to add a new bedroom has probably just paid enough extra interest on their loan to pay for half the bedroom anyway.
If you remember one thing, remember this: focus on the visible features as they drive the value perception.
There are a lot of formulas and industry rules of thumb about maximising perceived value. I discussed what perceived value of a property is last week - and it is important you have regard for it. Most highlight you should not spend a dollar on your house unless you expect to get at least $2 or $3 in return. I think that it can be dangerous to try and simplify every investment decision down to a simple formula when every house and budget is different. Also, there are some improvements that just have to be made that might not add much value to a property – but should be done anyway. These include visual repairs, safety issues, foundations, and some features people expect from the type of house they are viewing.
Let me classify improvements into some of the more common categories. At a broad level a homeowner has to determine whether they are going to undertake a “cosmetic” home improvement or a major “structural” home improvement.
Cosmetic home improvements
A cosmetic home improvement strategy typically targets a renewal and makeover of dated surfaces, updating key rooms like bathrooms and kitchens, replacing old fixtures with new fixtures, improving the appearance and décor of living spaces and re-landscaping. There is no highly disruptive works, structural additions, or removal of load-bearing structures, and there is also usually no requirement for any planning permits.
- Surface renewal
- Kitchen/bathroom update
- New lighting and hardware
- Storage upgrade
Structural home improvements
A structural home improvement can involve adding new rooms or space to a house or altering its structural design, and usually requires structural plans and approval. Structural improvements can take time and require specialist trade support so the homeowner should be confident that the change will add significant appeal or more floor-space value. An example would be adding a second level to a single storey house.
- New floorspace
- New building such as a garage or granny flat
- Conversion to open plan
- Second level
Many structural renovation plans also include a lot of cosmetic improvements. Removing internal structural walls to open up a rear living space and adding large bifold doors to a new outdoor living area is a typical structural improvement strategy. Clearly the rest of the house should be freshened up cosmetically too so the result is not just a tired looking house with a new back room. If you have committed to a structural change, think about what cosmetics can be done while you wait for planning approvals or the structural work to complete. For example, some landscaping or a façade upgrade are possibilities.
Determining your best property value improvement strategy
You need to decide which strategy you pursue, cosmetic or structural, and they key goals of the improvement strategy. Before you invest in a property it is best if you determine:
- What is the best improvement strategy for you (based on your time availability and budget), and
- What is the best improvement strategy for the property (based on its value upgrade potential).
If these two strategies are the same, then that is clearly the path you should take. If these two strategies are divergent, then you should seek some advice and carefully consider why you might depart from what is best for you.
Look at the property unemotionally as an investment. Why would you risk going above your budget, or stress your time availability? Is the prize that much better? There certainly are great stories about property investors that really stretched themselves financially but it all worked out in the end for a great outcome – but it can also go terribly wrong. Unless you are experienced, start with an easier and safer option.
Once you have picked a structural improvement path or a cosmetic improvement path your outlook becomes a whole lot clearer. You will be able to determine the timetable to exit, and the likely upside that is possible through your strategy. Then you should stick to your plan. Getting partially through a cosmetic upgrade and then adding some structural plans can really delay and disrupt the efficiency of the original project.
Cosmetic strategies can start without much delay
The extent of it is really a function of your budget. Most of the success stories I hear are material cosmetic improvements – sometimes with some small targeted structural improvements. The appearance and liveability appeal of a property can be materially improved with a cosmetic renewal strategy. The more tired the house looks before the cosmetic improvement, the more dramatic the positive change will be.
Targeting an expected value improvement of at least 3 times your budget spend is a good way to approach it – but think about the strategy overall rather than apply that rule to every single task. A house that has a fantastic cosmetic upgrade only in selective areas can confuse the value perception of the buyer. For example, upgrading only one bathroom in an old house and leaving the rest for the buyer will probably achieve nothing to enhance value perception.
A structural improvement strategy takes a lot of planning
A structural renovation strategy requires a lot more planning before commencement. You may need approval for some aspects of the improvements and you should definitely seek expert advice. Ultimately the process involves a planning and approval stage, and a project phase that will require professional assistance and management.
Pick what is best for you
Remember, it is your time and money that will be on the line. If you are after a quick win, or are new to home improvement and renovation then a cosmetic strategy is probably the best avenue. However, if the house is structurally challenged, or is very poorly laid out compared to what is desirable these days, then you might need to commit to a structural improvement or you will be at risk of buyers seeing past the cosmetics and noticing a requirement for major change. This outcome can be disastrous as your cosmetic investment would be disregarded.
Next week we look at some of the cosmetic improvements you should consider when planning to profit from a renovation. Stay tuned!