Renovation may be a popular way to extract more value from property, but the current housing market means investors need to ensure they don't overcapitalise when upgrading their property.
Blogger: Rory O'Rourke, principal, O'Rourke Realty Investments
Record-low interest rates and a slower property market are encouraging more Perth residents to renovate their homes, with the latest ABS figures showing that the value of building approvals for home renovations in Perth are topping nearly $600 million.
Overall, the value of building approvals for home renovations in Perth surged by 32 per cent or $144 million during 2014-15.
Homeowners and investors need to exercise caution when considering a home renovation the coming year. A well-planned and budgeted home renovation can be a great way to create wealth, but it needs to be undertaken only after careful research and planning.
Over the past year, an increasing number of Perth property owners have found it more difficult to sell their home and upgrade due to a slower property market. This factor, combined with low interest rates, has encouraged more of them to undertake home renovations.
At the same time, property investors are taking advantage of low interest rates to renovate older properties with a view to making their homes more attractive to tenants, due to rising vacancy rates and the resulting increasing competition among landlords to secure a quality tenant.
Typically, homeowners choose to renovate because they become emotionally attached to their property and decide to improve their home rather than move to different property that has what they require.
As a result, they risk over-capitalizing their home, which is one of the most common mistakes in real estate.
Homeowners tend to fall in love with their homes. So as their lifestyle needs change, they decide to undertake a home extension rather than upgrade to a new home.
The danger with home renovations is that the homeowner can spend thousands of dollars improving their home only to find that when they sell their property, they cannot recover the money they spent.
This warning is timely, as it is expected that house prices in most parts of Perth will remain stagnant during the coming year, and therefore there will be no significant capital growth to offset any major expenditures on home renovations.
Homeowners and investors should consider the following tips before undertaking a home renovation.
1. Focus on the front of the home, as this will improve the street appeal of the property. If the existing home has dark brown bricks and old guttering then consider rendering the bricks and replacing the guttering. Also, if you invest some money in better landscaping, this in turn will also improve the street appeal of the property.
2. Inside the house you should focus on the bathroom and kitchen areas. Improvements in these areas traditionally deliver high returns when the property owner decides to sell.
3. For ideas to improve the kitchen and bathroom areas, consider visiting new home display centres. These display homes will have the latest trends in new home design. They can also provide ideas on how to internally finish a home such as the colour of paints on walls and floor coverings.
4. You should also concentrate on the outside living area of the property as much as the inside of the property. The reason being one of the biggest trends in the Perth real estate market currently is a growing demand by home buyers for usable outdoor living areas. It is an important new trend, which is highlighted by the large number of project home builders in WA who are now promoting alfresco areas as part of the new home package.
5. Any renovation in this outside area should be fully integrated with the family and kitchen areas. This is because people want to move easily between their internal and external living areas, especially during the summer months.
6. It is important to ensure that you get local government approval for any major renovations to your home, such as building an alfresco area or new external walls.
7. If you are employing a builder to undertake your home renovations, check that they belong to a professional building organisation, such as the Housing Industry Association of Western Australia. In addition, you can ask them to view recent work they have undertaken in the local area.
8. Set a budget for your home renovations and carefully cost them. If you get a quote from a builder, make sure that it is in writing and that there are no special conditions attached to the contract.