Organising a home renovation can seem overwhelming. We've gathered together everything you need to consider.
As you put on your project manager hat, it’s likely that you’re knee-deep in spreadsheets, invoices and council paperwork. To help you plan, manage, and execute your renovation project, we’ve developed this guide to point you in the right direction.
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Many homeowners and investors renovate their properties with the objective of adding value and maximising their return, either in the form of a higher sales price for a residential property, or a higher rental income for an investment property. However, many Australian homeowners are also renovating their properties to better suit their lifestyles or to upgrade outdated fittings to reflect more modern designs and trends.
The objective and desired end result for your renovation will influence your budget, timeframe and renovation choices.
Increase property value
A well-designed renovation can add significant value to your property. The return on your investment will largely depend on the property type and location, as well as the scale and type of renovation itself.
It is estimated that a major renovation can add up to 10% of the value of your home, particularly if you hold on to the property for at least 5 years. For example, if your property is valued at $500,000 and you spend $25,000 on your renovation, you potentially make over $50,000- twice your initial investment.
You should speak with local real estate agents, a conveyancer as well as your existing lender to get an idea of how much value your planned renovation could potentially add to your property.
Maximise sale price
If you plan on selling your property in the future, a carefully planned renovation can help boost the property sales price. Keep in mind that if you’re renovating to sell, rather than renovating to live, you should take steps to ensure that any changes you make will appeal to a wide pool of potential buyers.
Investment property profit
By adding value to your investment property, you can charge a higher rental amount which yields greater profitability. As an investor, you can also benefit from depreciation and tax deductions which may help you generate wealth and diversify your portfolio.
Boosting rental income
|Total kitchen renovation cost||$24,000|
|Interest paid on loan @ 3%||$720 p.a|
|Approximate depreciation benefit||$300|
|Balance after depreciation||$420|
|Increased rent due to improved quality||$25pw|
|Additional income||$1,300 p.a.|
Whether it’s a growing family, a home office or a retirement lifestyle, you may need to reconfigure the layout of your home, or create more space throughout. This could involve undertaking a major structural renovation to add new rooms, an additional bathroom or a guest room to leverage the available space.
From real estate agent fees to stamp duty to conveyancing charges, the costs involved in selling and purchasing a new property can be exorbitant. Generally (and depending on the scale of the project), renovating or upgrading your existing home is a cheaper alternative.
Should I renovate?
- Increase property value and generate profitability
- Improve standard of living
- Expand existing space
- Substitute outdated fixtures and appliances for better quality ones that will provide greater durability and a modern appeal
- Save money by renovating instead of relocating
- Potential to overcapitalise
- Time, financial and emotional stress (and resources) required to complete renovation
- Inconvenience of living through renovation or moving temporarily
Average renovation costs
For a major renovation project, including the renovation of; a kitchen (10 sqm), main bathroom (5 sqm), master bedroom (8 sqm), a second bedroom (6 sqm), laundry (4 sqm), patio (8 sqm), ensuite (5 sqm), study (6 sqm) and dining room (7 sqm), the costs are as follows, depending on whether you go for a budget, typical or luxury build
|Budget Cost||Average Cost||Luxury Cost|
Source: Home Design Directory (2015)
To avoid budget or timeline issues, you should plan carefully for your renovation prior to commencing the project.
Set renovation objectives
Before you begin the project, ensure that you set realistic objectives for all the things you’d like to achieve during the renovation. To facilitate your planning and budgeting, it’s a good idea to separate the big ticket items form the luxury items to ensure that you stay on track (and within your means).
If you’re contemplating major renovation, you may want to consider planning the renovation in stages. For instance, you might want to upgrade your bathroom but then wait a couple of months before renovating your kitchen area. Staging your project can give you the time you need to get your finances back in order which also provides you with a "breather" in between major stages to re-focus on the next section of the project.
Assess your property
Before you commence your renovation, arrange for a home inspection to identify if there are any structural problems. This will help determine any hazards or problems from the outset, rather than creating stress and hassles if you discover them halfway through the renovation.
It’s a good idea to get your property appraised by a conveyancer to determine its value as well as the projected value once the renovation is completed. You should also speak with local real estate agents to see if they have any further recommendations about how you can boost your property value for the specific location and market.
Check with your local council and authority to ensure that your renovation meets regulations and guidelines.
If you live in a unit or apartment, you’ll also need to liaise with your strata manager or body corporate to see if your plans will be approved.
Your home renovation must meet basic requirements for health, safety and structural soundness as stipulated by the Building Code of Australia. The permit process also ensures that your plans are in accordance with local government requirements such as planning and environmental regulations.
Set project budget
At the costing stage, you should break down your individual costs for each part of the renovation. For instance, if you’re planning to tile a wet area, you should separate the costs for each separate task (e.g. waterproofing, tiles, labour) as this will help you keep tabs on your expenditure.
Once you’ve broken down your costs, you’ll need to estimate your renovation expenses. Ensure that you source quotes from at least three different professionals for each major task to ensure that you get the best deal. Consider all the trade services you’ll need including building inspectors, architects, engineers, builders and other specialised tradesmen such as plumbers and electricians.
As a rule of thumb, you shouldn’t spend more than 5% of the property purchase price on a renovation project, though this may vary depending on your individual circumstances.
It’s crucial that you allow for hidden costs such as council fees and allow for a contingency buffer of at least 10-20% of your budget so you’re prepared for any unexpected costs that may come up.
The building contract defines the agreement between you and the builder and outlines the responsibilities of both parties.
Some of the elements which should be covered in the renovation contract include:
- Scope of work: This will include a description of the works to be carried out by the builder, as well as the work which will be carried out by independent parties.
- Timeframe: The contract should identify the start and completion dates for the project and include a statement saying that the builder is not responsible for delays for circumstances beyond their control.
- Payment terms: This should determine the total amount of the contract as well as the payment schedule and identify how taxes will be treated.
- Variations: Once the renovation is underway, any variations or changes to the work must be drafted as a variation document and signed by both parties.
- Warranty insurance: Builders must obtain a policy of homeowners warranty insurance before beginning the renovation. This policy covers you for defective works and non-completion works. It is also important that your builder takes out public liability insurance as a precaution.
- What if I need to make variations to the works?Although you may have planned your renovation carefully, chances are you may make some changes to the original plan. Licensed builders will be accommodating of any changes or additions you want to make throughout the project, but before you make any changes make sure you consult your builder.
Should I still live in my home during the renovation?
Some renovation projects can be really restrictive and make life difficult while they're in progress. However, whether or not you live through your renovation is completely up to you. For small-scale renovations, it may not be necessary to move out during the project whereas for major renovations, it may be appealing to move out. Keep in mind that this will probably be more expensive.
Once you’ve planned for your renovation, you’ll need to decide how you will pay for the project, and how much you can afford to spend.
A type of financing that works well for one person may be the completely wrong choice for another. It's very important you work out exactly what your renovation project is going to cost and then consider your financing details based on your own personal financial situation.
Do your research and compare your options, but you can read more about some of the common renovation financing options by clicking the link below.
What should you ask your lender when renovating?
Before you sign on the dotted line for your building contract or finance documents, make sure you prepare some questions for your lender.
What fees are involved?
Always ask what fees and charges are involved in setting up your loan. Some lenders will charge application fees or establishment fees. Some will charge a monthly account fee you need to pay on top of your normal monthly payment. Others may charge a separate valuation fee or legals fee to set up your loan. If you're borrowing a high percentage of the property value, ask how much you'll be charged for your Lender's Mortgage Insurance (LMI) fee.
What is the comparison rate?
While the advertised interest rate may appear competitive, always check what the comparison rate is. If you see a comparison rate that is only marginally higher than the actual interest rate, you know you aren't being stung with additional fees and charges. However, if the comparison rate is quite a lot higher than the advertised interest rate, ask what fees apply to your loan.
What loan features are available?
Different types of home loans will have a range of different features attached to them. Look for features such as flexible repayment options, which allow you to make extra payments without penalties. You may also want to consider a redraw facility, so you can withdraw additional payments if you want to use that cash for other things later.
A portability option is also handy for some people, as you're able to take your loan with you if you sell one house and buy another. This saves you the hassle of setting up a new loan. Always check that the features on the loan you choose suit you and your financial needs.
Over-capitalising on a renovation project
One of the major drawbacks of renovating is the risk of overcapitalising: when the cost of the renovation outweighs the amount of value added to the property.
If you’re renovating your home and you intend to live in the property for an extended period of time, then the risk of over-capitalising may not be as high. You may have spent $75,000 on the renovation and only increased the property value by an additional $25,000, but if you’re not selling in the immediate future then this isn’t automatically problematic. Given that you’ve purchased in a good location, you have time for inflation and appreciation of prices to kick in.
However, if your intention is to increase the value of the property, sell and make a profit, you could be in for a shock. Far too many investors underestimate the real amount of money they need to spend and overestimate the amount they'll get on resale of the property.
You have two options if you spend too much on your renovation. You can sell the property anyway and take a loss on the amount you spent, or you can hold onto the property and hope that the market turns in your favour over time to help you recoup some of your costs.
John and Jane
John and Jane wish to spend $15,000 on a complete kitchen renovation. They know they can top up their mortgage easily at an interest rate of just 5.75%. By comparison, they're quoted 10.25% on an unsecured personal loan.
John immediately wants to sign up for the cheaper mortgage top-up option, but Jane does some quick calculations to look at the differences and alternatives.
|Home Loan Top-Up||Personal Loan|
|Loan Term||30 years||5 years|
|Total Interest Paid||$16,512.93||$4,233.24|
In this example, the monthly repayments for the mortgage option seem so much more affordable at just $87.54 per month, as compared to paying $320.55 per month on the personal loan.
However, choosing to top-up the mortgage means repaying the renovation costs over a 30 year loan term. By comparison, the personal loan is set over a 5 year term. While the initial monthly payments might be higher, John and Jane can pay off their debt in just 5 years.
Aside from this, the amount of interest they end up paying if they opt for a 30 year mortgage is $16,512.93 overall. They end up paying more in interest than the original amount they borrowed.
Yet if they repay the renovation debt over a 5 year personal loan term, they end up paying just $4,233.24 in interest charges.
Based on this example, a personal loan may be the cheaper option for this renovation project.
How to lessen your renovation risk
In order to avoid over-capitalising, you shouldn’t spend more than 15-20% of the property value on your renovation.
However, it’s still important to consider how much value you can realistically add to a home in the local market. You should conduct some research into the local property market regarding median property prices, median rental yields and price growth trends.
Get your home valued so you know exactly how much it's worth in its current state and seek the services of a conveyancer and local agent so you know how much value you can potentially add once your project is finished. Look at similar properties in your suburb and take note of the sale price. Consider when the properties will sell and contact a local agent to see what the sale price was and consider whether the sale price is significantly lower than the initial asking price.
You can access free suburb reports from CoreLogic, Residex and realestate.com.au which can provide useful information regarding property sales, median prices and demographics.
This market research can also help you decipher which types of renovations are more likely to add value to your property. For instance, some real estate agents may advise for you to upgrade your bathroom and kitchen to achieve a better sale price in the given suburb.
Mistake 1: Not researching
Many renovators base their property price research on causal searches on real estate websites. They see that similar homes in their area are selling for good prices, but they fail to take into account that different streets within suburbs can have very different price thresholds.
Neighbouring homes can have an effect on your final sale price, especially if they have very poor street appeal. Always think about your intended market and the demographics within the local area.
Mistake 2: Underestimating costs
One of the biggest mistakes many renovators make is underestimating their project costs. Getting quotes on the cost of building materials is a start.
But have you factored in architect's fees, local council fees, labour costs, professional fees, the cost of unexpected delays, additional contingency costs for problems found during renovations, GST and other taxes? Most people don't think about these elements, which can cause them to blow out their budget.
Mistake 3: DIY projects
While DIY projects can be a good cost-cutting tactic, it’s important to remember that there are some tasks that are best left to the professionals. If you undertake DIY projects yourself and aren't competent, you may have to spend money fixing faulty work further down the track.
Mistake 4: Not sticking to a budget
A shortage of funds may mean that you’re unable to finish the project. If your renovation isn't completed you won't be able to sell the property at the profit you initially anticipated. While it’s tempting to opt for luxurious fittings or finishes, try to stay within the parameters of your budget.
Mistake 5: Renovating the wrong elements
A common problem with many renovations is that the owner has spent money renovating the wrong elements, and chosen options that are unlikely to add value to the property type and location. To avoid this, ensure that you engage in thorough market research and consult professionals who can guide you through your renovation planning. Generally, you should avoid spending the bulk of your budget on low-traffic rooms or areas that are not used frequently, such as a guest bedroom or laundry.
Mistake 6: Underestimating the disruption factor
While the thought of a modern and completed renovation is exhilarating, you need to carefully consider the reality of the project in process. A large-scale renovation can be noisy and disruptive to family life.
Mistake 7: Selecting a builder based on price alone
While it is always tempting to go for the lowest quoted price, you need to consider the implications of doing so. Does the builder have the required experience? Will they provide a warranty on the project?
Tip 1: Compare and manage your quotes
Ensure that you read the quotes you receive and check to see what’s included and what isn’t. Ask for quotes to be itemised so you can see exactly where your money is going. Some builders may add a premium on the labour costs they’re charged by subcontractors while others may show the GST they are charged by their subcontractors, and then charge you additional GST on top.
Once you’ve compared all your quotes, negotiate with your builders to see who can offer the best value for money.
Tip 2: Prime cost (PC) allowances
A PC item is any item with an estimated price which means that the illustrated price is not fixed and the actual cost can vary significantly. If you can, try to avoid PC allowances so you have a clear understanding of your costs and can better manage the cash flow for your renovation.
Tip 3: Inclusions and exclusions
Always insist that your quote and your contract contain an accurate listing of all inclusions and exclusions. Be very careful when negotiating for exclusions. What builders charge you to add in certain items may not be the same amount of money they deduct to exclude it.
Tip 4: Variations
Most builders include a clause in their contract for variations or changes to the scope of work. For instance, if the builder discovers termites or damaged pipes halfway through the project, that would create a variation. Always try to get a copy of any invoices or receipts for materials and labour costs to ensure you're paying the agreed rate.
Tip 5: Quote expiry
You may find that some quotes may only be valid for a certain period of time. If you're shopping around for quotes right now but you don't expect to start your project for another few months, you need to verify that the amount you hope to spend is still valid in that time. If your quote has expired, you may find that costs have risen, which can blow out your budget.
Tip 6: Timeframe
It's one thing to choose the cheapest quote you receive, but it's a different matter if the timeframe involved in completing the work blows out to much longer than you anticipated. If you're paying interest on a mortgage throughout the renovation period, an extended delay or slow work times can increase your overall costs. Always compare the estimated time to complete when assessing quotes.
The timing and schedule of your renovation is up to you. If you are doing much of the work yourself, you determine how long it will take to get things done. You might be restricted to only working on your project on weekends or around working hours. If you have a builder involved in the project, your builder should advise you of an estimated time frame for completion.
Tip 7: DIY projects
If you have the skills and the time, you can stretch your renovation dollars by taking on some of the work yourself. Generally, builders recommend that you leave structural and mechanical renovations to the professionals, but many homeowners can competently do their own painting, landscaping or other finishing jobs. Talk to your builder about the effect of do-it-yourself work on scheduling and the builders warranty, keeping in mind that you should try not to interfere in the way the builder intends to manage the project.
Choosing the property
A critical decision involved with your value-adding capabilities is associated with selecting the right property type for your needs. If you can find an unpolished gem at a bargain price in a great suburb, you're off to a great start. From there, it's all about maximising your returns and ensuring you get the best possible sale price for a renovated home in that location.
Small projects that may increase value
There are times when simple upgrades can yield greater profits than large-scale projects. These can include;
- Paint. Freshening up the paint in a room or on the exterior of a house is a cost-effective way of transforming the appearance of a property.
- Street appeal. No matter how good the interior renovation might be, it's the kerb appeal that can sway a buyer's decision. Clean the bricks with a pressure cleaner and paint any peeling paint on gutters or eaves. Replace broken or rusted gutters and downpipes and be sure they're painted freshly too. Shabby or unkempt gardens should be neatened up. Use plants and shrubs creatively to create an appearance of more space or to highlight features of the property.
- Floor coverings. Consider replacing faded, worn carpets or worn vinyl flooring with more modern options. It's easy to transform a room into a more appealing space by considering different floor covering options.
Medium renovation projects that may increase value
There are properties that can be improved enormously by completing a medium-sized project. This is especially true with older style homes that may not have the same amenities and living space as more modern homes. Some medium-sized projects that may improve property value include:
- Outdoor entertaining area. Adding a pergola or outdoor alfresco entertaining area can be a big drawcard for many buyers, especially if the outdoor space flows smoothly from the interior of the home. Consider changing old narrow doorways to larger bi-fold doors or sliding glass doors to integrate the inside living area with the outdoor entertaining area for maximum appeal. Find out how much it costs to renovate your backyard.
- Kitchen. Updating a kitchen can be helpful for improving property values but ensure that you plan a functional kitchen design that leverages the available space to avoid overcapitalising. Learn more about kitchen renovation costs in Australia.
- Bathroom. Update old tiles and fixtures and consider creating more storage space in your bathroom with modern amenities to create a luxurious feel. Read our guide for bathroom renovations here.
- Laundry. Many older style homes have enormous laundry areas that are under-utilised. Consider adding more storage space or installing a workbench in the laundry. If the room is large enough, you may be able to divide it and install a separate toilet or even a small bathroom, including a shower and vanity area. This may increase the appeal of the home if there is only one main bathroom in the floor plan.
- Living area. Some older homes feature floor plans that have a small living area and a separate dining room alongside it. You may be able to improve the floor plan and create an open-plan feel by knocking down walls and redesigning what you have to create more space.
Renovation expert Cherie Barber's tips for renovating to increase value
- Don't buy on the downside of the street. Don't pay more than 2% of the property value on renovating the kitchen or bathroom.
- Use big tiles. Use horizontal tiles to make the room appear bigger.
- Due diligence. Ensure you ask the council whether there have ever been any building applications denied or withdrawn for the property, what the zoning is for the property and the surrounding neighbourhood and what development applications have been processed in the vicinity of the property. Big commercial or even residential developments are a bad sign.
- Invest in things that can be seen. Insulation, for instance, is not worth the expense for a cosmetic reno.
- Return. Make a minimum of $2 of return per dollar spent.
- Lift sales. Sell all the materials from your renovations at a demolition sale.
- Stagger your offers on property. As each bid gets higher, attach more conditions, such as immediate access to site to improve it, extended settlement to reduce your holding costs and a minimum deposit, i.e. less than 10%.
- Consult professionals. Surround yourself with qualified and trustworthy tradesmen.
- Renovate big ticket rooms. Upgrade your own kitchen and bathroom and then get the bank to revalue the property once these are completed. Use the proceeds to fund your first cosmetic renovation.
What qualities should I look for in a builder?
- Communication: Good builders should possess strong communication abilities as they will need to execute your ideas and objectives, and manage the project effectively.
- Expertise: Ensure that your builder is licensed and has relevant experience to carry out the required work.
- Reputation: Experienced builders will be happy to provide you with references and testimonials from previous customers as well as a portfolio of completed work.
To ensure that your builder is registered, you can contact the Builder’s Practitioners Board.
What responsibilities do I have if I’m undergoing a renovation?
This depends on the nature and scale of your renovation project, as well as the state in which you reside. If you're just updating the kitchen or remodelling the bathroom, then you may not need approvals. However, if you're building an outdoor deck or pergola or building on a new room you may need to submit your plans to council for approval.
As the homeowner, you are legally responsible for organising a building permit if required for your project. However, your builder can help investigate this on your behalf.
Kitchen or bathroom renovation? Which adds more value?
It’s well-known that kitchen and bathroom upgrades are some of the best ways to add value to your property. However, in Australia, renovating a kitchen is only the fourth or fifth highest adding-value technique, depending on the location. Bathroom renovations typically add more value compared to kitchen upgrades.
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