Whether in business, property or even the lottery, we all want to make money and in today’s real estate environment, property owners and investors are in the best situation to do so. Put money into giving your property a fresh new facelift and hey presto, you’re well on your way to reaping the rewards. But there are a number of things to think about before you start throwing money at the walls and these things will help you avoid the pitfalls of high renovating costs.
One of the first things you’ll need to ask yourself is ‘will this actually work?’ Will this add value to my home and can I even afford the changes I want to make? The feasibility of a project is particularly important for those of you who are buying property to renovate and sell once all the improvements are done.
The best way of understanding the feasibility of your project is to know how much money it’s going to cost you from the start. Costs to consider include:
- Design Fees. Yes, you will need someone to actually draw out your plans and this will often be the down to the architect. Most will charge between 8% to 15%of the total project fees, and that doesn’t include project management and correspondence.
- Planning controls and possible processes. You will usually need to submit a development application to your local council. This can take time to process and will incur certain costs. You should consider engaging a town planner and this will cost you extra but it’s definitely money well spent.
- Builder, utilities and associated works. You need someone to bring your design dreams to fruition. Costs associated with building vary widely depending on the size of your project – installing a new kitchen will have far different costs to building a new house. You will also need to budget for any utility costs such as electricity or water installation. Think about any friends or friends of friends who may be able to give you mates rates.
- Can you stay or go?
If it is a minor renovation you may be able to stay home but if it is larger it is possible that you’ll need to vacate the property. Can you live with parents or friends to save money? If not, make sure you budget for this.
- Stamp duty and selling agent commissions. These may be the very bane of your existence and a cost you’d probably rather not think about. And on top of this, it’s thousands of dollars worth of money for seemingly nothing in return. But do not make the mistake of lumping these costs into the “future problems pile”. Instead, your best option may be to opt for the “buy-renovate-rent” strategy. Thus you benefit from capital growth and equity from the renovation while someone else pays off the interest on your financing.
- Miscellaneous. Nothing ever goes exactly to plan. Quite often a project can take longer than planned thanks to weather or delays. This can impact your bottom line. Make sure you factor in holding costs. That is, paying the mortgage during construction. Have 10% extra for these costs in order to avoid falling into a mess when things don’t go exactly the way you’d hoped.
How to Fund your Project
- How much equity do you have on your loan?
To work out how much equity you have in your property, you’ll need to subtract any debt remaining on your mortgage from the property’s overall value. eg. if your property’s worth $500,000, and you have $300,000 left on your mortgage, then your equity is $200,000.
Your property’s equity will increase both as you pay off your mortgage and as the property’s value increases. So, if your $500,000 property increases in value by 10% over 12 months that’s an extra $50,000 in equity. Use this to your advantage!
- How much do you need to borrow?
Once you’ve worked out what your usable equity is then you’ll need to calculate the estimated total costs of your project, which include design fees, building costs, relevant taxes, etc.
- Which type of loan?
At this stage you’ve decided that you can afford your project but the decisions don’t just end there. Not many of us have spare tens-of-thousands of dollars laying around. Because of this sad fact, you may need to borrow the money and you need to decide how. The main options to think about are:
- Construction or building loan
- Personal loan
- Line of credit
- Home equity loan
The best way to find out which option is going to work best is to seek advice from a professional.
That Dreaded Word – “Overcapitalisation”
Overcapitalisation is a word dreaded among investors and home owners. Overcapitalisation is when you spend more money on improving a property than you will ever get back when selling. What this really says about your project is that it was a waste of your time and hard-earned money. Even if it’s a “forever home” you’re renovating, it’s something you should bear in mind. To avoid the disappointment of overcapitalisation, talk to someone who knows what they’re doing.
Author: Andrew Mirams is the Managing Director of Intuitive Finance and is a highly qualified mortgage advisor who holds dual diplomas in Financial Planning (Financial Services) and Banking and Finance (Mortgage Broking). With over 27 years of experience, Andrew has been acknowledged by the mortgage industry as one of its best performers. He has multiple awards, including regularly featuring in both the top 100 mortgage brokers list and Top 50 Elite business writers. He was voted Victoria’s favourite Mortgage Broker at the 2015 Investors Choice Awards and Intuitive Finance won the 2016 “Best Independent Office” and “Best Customer Service” at the recent 2016 Better Business Awards. Visit Intuitive Finance for more information.