Tips for a successful property renovation

At some point in time we’ve all considered the merits of renovating the property we own, whether we’re an owner occupier or an investor.

And according to the Housing Industry Association there are a lot of us actively renovating, with Australians spending around $30 billion per annum on home improvements.

And with around nine million private dwellings in Australia, that means we’re spending, on average, around $3,300 on renovations per dwelling each year.

Whilst the road to property renovation is a well-trodden path, it can be a rocky one, with many pitfalls and traps to be wary of.

To avoid the major bumps along the way and help make your renovation project a successful one, over my next two columns we’ll explore my top tips and traps when it comes to property renovations.

In this column we’ll start with my top tips:

Tip 1: Be clear about why you are renovating

Renovations can occur for a number of reasons, including:

• changes to family circumstances where more space or a different layout is required due to the arrival of say, children or the need to look after elderly parents or other family members

• when moving is not a viable or desirable option. For instance, it might be cheaper to renovate than sell and buy another property (for instance they’d be stamp duty, selling agent fees as well as moving costs to pay) or there is a preference to stay in the same street or neighbourhood (due to say the proximity to schools and being near friends and family)

• where modernising and updating is needed to meet current lifestyle and personal needs

• there is a plan to sell the property and renovating it is seen as a way to add value (above and beyond the cost of the renovation), or to make the property saleable.

• as a means of differentiating a rental property from its competitors and make it more desirable, thereby maximising rental yields and capital growth potential

Whatever the reason and whatever the budget, it’s important that any renovation helps achieve your objectives – both financial and personal.

Also read: How to use an investment property to buy your first home

Tip 2: Do your sums

Whether your renovation is large or small make sure you prepare a budget and a project plan. Your budget covers off on the costs and helps determine affordability while the project plan focuses on timelines and key activities.

In setting your budget it’s important to shop around to get the best price. And when using external suppliers or buying major items (like appliances and furniture and fittings), I suggest you get at least three quotes.

And remember, the cheapest is not necessarily the best so make sure you do your research. For instance, jump online and check out reviews and recommendations and ask friends and family for their thoughts and ideas.

And remember to always ask for references when using builders and other trades people.

You should also allow for slippage in your budget. For instance, if you’re budgeting to the last cent and there’s no allowance for the unexpected, be mindful of taking on the project.

There’s always the possibility costs will come in higher than expected and for this reason it’s a good idea to allow for a 10 per cent to 15 per cent contingency when finalising your costings. The same goes for completion times.

Unless you can get an iron clad completion guarantee, you should allow for time slippage to give yourself room to manoeuvre if things don’t go to plan.

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Tip 3: Get your finances in order

Your budget will tell you how much you’ll need to spend and this will inform you whether you can pay from your existing savings or whether you’ll have to borrow to make your renovation a reality.

If you plan to pay by cash and you’ve got the money in the bank then great. Otherwise, you’ll need to save for any shortfalls.

To do this, subtract how much you’ve already saved from the cost of your renovation and divide this by how much you can set aside each month. So if your renovation will cost $30,000, and you have $15,000 in the bank and can save $1,500 per month, it will take one year to save the difference:

($30,000 - $15,000)/$1,500 = 12 months or one year

On the other hand, if you need to borrow (say because you don’t have the spare cash or saving up will take too long) then you could consider increasing your mortgage.

To do this you’ll need to assess whether you can afford higher mortgage payments and whether you have sufficient equity in your property.

To work out your affordability, jump online and use free online mortgage calculators to determine what your new mortgage payments would be and then assess whether the family finances could cope.

To work out whether you have sufficient equity you need to get your property valued and then subtract your current mortgage to determine your current equity.

You can get an indication of your property’s value by jumping online on using free property reports or by approaching local selling agents who provide free appraisal services.

To get your free online property report, simply type your address into Google which will throw up of list of organisations that provide this service. Just be mindful of those sites that ask you for your contact details as you may end up with an agent ringing you. If you don’t want this to occur, stick to sites that give you an estimate without asking for your details.

And remember, it is the lender’s valuation that counts when it comes time to refinance.

If you do intend to drawdown on your mortgage then use this as an opportunity to do a home loan health check to make sure you’ve got the best deal. That is, that you’re getting the lowest interest rate and best product features.

This may mean you need to change lenders so make sure you do your research or approach a mortgage broker if you need help.

It’s also important to try and match-fund major renovations. That is, you should ideally look to match a long term renovation (like major extensions or a brand new kitchen) with long term finance – like a home loan. This is because it is usually more affordable and your loan term better matches the life of the renovation.

Funding a major renovation on your credit card or a personal loan may not be ideal as the interest rate is typically more expensive.

The flipside to this, is that you’ll probably pay back more overall over the life of your home loan than say a personal loan, but because personal loans are repaid over much shorter time-frames (e.g. five to seven years), their monthly repayments will be much higher which could put considerable pressure on the family finances.

Also read: How to get on top of your debt in 2015

Tip 4: Assess your property before you start

You might have some fantastic renovating ideas but it’s important you step back and objectively assess your property before you begin.

This in part will help you determine whether it’s worth the time, effort and money to undertake the renovation.

Another important issue is to ensure the property is able to cope with any major renovations, especially structural ones.

The last thing you want to do is start an extension or second storey only to find major problems with say the foundations, or that there’s pest infestations. The remedial work to fix these problems could blow a hole in your budget making the whole project unviable.

If there’s any doubt it pays to get a structural and if needed, a pest inspection before you begin. This will help give you peace of mind there are no major issues waiting to be uncovered.

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Tip 5: Get help

It is tempting to go it alone when renovating your property. And if we’re talking about minor works or a bit of paint here and there then that’s fine. But as soon as you start moving into major works involving reasonable sums and/or the need to borrow, then you should seek independent advice.

This advice could come from a variety of sources:

• Selling agent – to help you assess whether your renovation will add-value to your property or how it would affect its resale value. They may even have ideas you haven’t considered

• Builder – to help cost, manage and assess the project, advise on any Council planning permits and provide additional ideas and suggestions

• Architect – to help design and bring your ideas to life

• Mortgage broker/lender – to advise on funding options

• Legal advisor – to assist with building and mortgage contracts, if needed

• Interior designer – to advise on layout and floor plan (which might impact the renovation itself) as well as things like furniture and fittings, floor covering and of course colour schemes

• Friends and family – a great source of independent and honest feedback on your planned renovation

In my next column we’ll look at the major traps of property renovators should avoid.

Also read: How to beat competition when buying a home

Peter Boehm is the Finance Editor of onthehouse.com.au which offers a unique information source on virtually every property in Australia and provides data on a property’s sold and rental history as well as current property valuations. The onthehouse.com.au Investor Centre provides research on suburbs, market update reports and calculators to help investors make informed property decisions.