The property market remains hot news in many parts of Australia but there is one less talked about sector of the market that is ALSO booming…
Home renovations are back – in a big way!
In fact, did you know that Australians are currently spending $165 million per month on renovations?
After a slump a few years ago home renovations accounted for almost 35% of total residential building in 2015 and activity has been increasing every month since August 2016. The Housing Industry Association (HIA) expects this trend to continue predicting that renovating will be the next ‘construction’ boom.
What is driving this boom?
For owner occupiers…
Rising house prices combined with a lack of affordable supply in a number of areas in Australia often makes renovation a more viable option for potential upgraders.
With a lack of suitable properties they are instead choosing to upgrade their existing home.
For property investors…
As lending criteria for property investment loans tightens, investors seek to reign in loan to valuation ratios (LVRs) by searching for more affordable properties.
Buying an older (cheaper) property and adding value via renovations may provide a greater opportunity for either short term gain through ‘flipping’ or longer term growth as a result of higher rental and/or capital growth over time on a more appealing property.
The key to using home renovation as a strategy for future gain is to DO YOUR HOMEWORK!
Regardless of your reason for renovating there are some essential tips that ALL would-be renovators should know.
Renovating an existing home will generally attract a higher cost per square metre than building a new home. It can be a big (and sometimes emotional) decision whether to knock down your existing home and rebuild a new home instead.
Before going down the renovation path the key points to consider as an owner occupier include:
- How old is your home? Aged wiring, plumbing etc can lead to cost blowouts from previously unidentified issues. Explore all contingencies BEFORE proceeding.
- Location and lifestyle – do they fit your present AND future plans?
- Can you live there while renovating? What are alternative accommodation costs?
- Do you REALLY want the hassle of renovating?
- Availability of tradies. Boom times could mean a shortage of skilled tradies and add significant time or a lesser result to the process.
- New is easier to maintain, less susceptible to termites and more energy efficient.
Before deciding on renovation versus a knock down/rebuild it is essential to crunch the numbers. As part of the process perhaps consider enlisting the services of a valuation expert? If you would like a recommendation to our preferred property valuation service please call the office.
Expert help provides a guide to current versus future values of each alternative so they can be weighed up against your estimated costs.
Renovating could provide investors with opportunities to increase rental returns and/or the equity in their properties, however research and crunching the numbers is ESSENTIAL. It is important to follow your head and not your heart!
As a rule of thumb renovating should give you a return of at least $2 for every $1 you spend. It pays to do your homework in the local area:
- How do sales or rental yields of renovated properties compare with those in original condition?
- What features make some properties highly sought after while others wallow on the market?
- What are essential renovations versus the ‘nice to have’?
Visit recent developments that are selling fast to see what builders are doing that have high appeal.
Tax benefits of renovating
Many investors don’t consider the value of the items they are throwing away during renovation. If an investor renovates a kitchen or bathroom – or even replaces carpet or a hot water system – they may have the opportunity to claim depreciation deductions under a process known as ‘scrapping’ or ‘disposal of assets’.
This rule has recently been amended to limit depreciation deductions to only expenses that have been directly incurred by the investor for properties purchased after 9 May 2017, however existing investors could still take advantage of the previous rule.
Scrapping allows investors to claim the total remaining depreciable value for items that are thrown away in the year of their removal. You should also factor in deductions you can claim for new items added to the property.
Arrange a tax depreciation schedule from a quantity surveyor BEFORE you commence renovations to avoid throwing away thousands of dollars in old items and to ensure deductions for new items.
If you need a referral to a quantity surveyor or our preferred taxation specialist then give us a call.
The common denominator…
Of course the common denominator in any decision about renovating is FINANCE. How are you going to fund your plans?
There are a number of options for financing a renovation or rebuild. The type of finance you choose will be dependent on the size and cost of the renovation and your individual circumstances. Options may include:
- using the equity in your home
- construction loan – for a major renovation or rebuild
- line of credit
As your finance specialist it is our role to help you explore the option most suitable to your circumstances and your future financial goals.
Are renovations on your mind? Call the office and we would be pleased to book you in for a chat to discuss your finance options.
Disclaimer: This article is generic in nature. All finance and investment decisions should be considered wisely and based on your personal and financial circumstances. Seek proper advice before committing to any course of investment action. This is not deemed as advice.