Before you commit to a renovation, weigh up all the pros and cons to ensure you realise a return on your investment.
Many property owners, at some point, dream of renovating a kitchen, bathroom, or adding extra rooms. This usually requires a substantial financial investment, so you’ll want to know if there will be a return on that investment when you later decide to sell your home. This is true even if the renovation or remodel is necessary for your immediate needs.
Typical interior renovations include:
- Updating bathrooms and kitchens
- Building a garden cottage
- Converting a garage to add new rooms to the home or a ‘granny flat’
- Adding much-needed storage
- Converting the area between the ceiling and roof into a new floor
There are many factors to consider if you want to see a return on your investment in improvements.
Factors to consider
- Most projects of this nature do not realise a 100% return on investment
- If your renovation requires a loan, you may not qualify for it (source)
- The quality and workmanship of your renovation
- Moving or adding electrical and water systems
- Approvals from your local council
Other factors that will come into play
- The season you choose to renovate: the rainy season delays construction
- Price fluctuations as determined by market conditions
- Renovation quotes are usually valid for only six weeks
- Community impacts, such as in a Sectional Title estate, which generally only allows building at certain times
- Not accounting for ‘extras’, such as being unable to source the type of products you initially wanted to install
- If it’s a major renovation, can you live with the noise and mess, or can you afford to live elsewhere while the building is ongoing?
- Renovations often take longer than initially expected
Pre-reno estimates
Before going ahead with a remodel, you need to have a good idea of what your property is currently worth. There are two main options:
- Request an estate agent to supply a free evaluation, making it clear that you are not in the market to sell. The agent can also give you an idea of what the property may be worth if you go ahead. Doing this can save you a lot of effort, plus most estate agents know what you are competing against in terms of similar properties in the area.
- Pay for a professional property inspection and valuation. Everything will be inspected and may reveal problems that you may not be aware of, such as old electrical systems or roofing issues that may need to come up to compliance before you can undertake any new work.
You could also research what similar properties in your area are selling for and compare them to properties that include the type of additions you plan to make.
If you are adding a cottage to your premises for rental purposes, you will need to ensure that the building is well-designed to attract the type of tenant you want. New builds often come with ‘latent’ problems, meaning that problems with the build only arise after a month or more. Can you recover the cost of building that cottage through the rent you will be earning, and how long will it take before the rental becomes profit?
Beware the contractor
Some renovations are done ‘on the cheap’ and do not have sustainability, meaning that at some point you will likely have to do repairs or replacements, which will further add to the overall cost of the renovation in the long run. Buyer’s remorse applies here, especially if you cut corners, buy inferior products, or fail to check the credentials of the builder or renovator (source).
Checking those credentials means asking if the contractor is registered with the right authorities and also asking for testimonials. You can ask the contractor to supply you with the names and phone numbers of people they have previously undertaken work for. It is highly recommended you contact those clients and ask them questions about the quality of the workmanship.
General return on investment formula
A simple formula to use: Add to the current value of the property, 70% of the cost of the renovation. (70% is a guideline based on the average return on investment of a remodel).
If it works out that the renovation does not bring your property’s value up and in alignment with similar properties in your area, you may want to reconsider and opt to sell your property rather than go through the irritation of construction.
Also bear in mind that renovation quotes rarely align with the final invoice. It may be that during the course of the actual remodel, problems are encountered that require fixing, fittings and fixtures pricing has increased, or you may even decide to add superior fitments. Adding an extra 20% to your budget is advised to cover unforeseen expenses.
With careful planning and decision-making, there is no reason why you cannot significantly increase the value of your property and make a good return. In the worst case, you should be able to break even.
