Hidden costs of renovating - November 2018
The old adage goes that when one door closes, another one opens, and such is the case with property investment.
Over the past year and a bit, the door has closed – temporarily at least – on assured and speedy capital gains in some real estate markets. Where investors could have not long ago expected to see the value of a house grow in a short space of time in many parts of Sydney and Melbourne, now the trend is generally heading in the other direction.
That doesn’t mean there aren’t opportunities to make savvy and strategic investment decisions though. And renovating to add value and make profit is one.
But it’s not as simple as snapping up a bargain, giving it a bit of TLC and flipping it. For novice renovators in particular, there are hidden costs that you must be aware of – or risk losing out after all your hammer-swinging blood, sweat and tears.
What lies beneath
Imagine you were in the market for a car and came across a decent-looking second hand number that fit your criteria. You wouldn’t just hand over your cash and drive off into the sunset without lifting the bonnet, would you?
According to research, half of Australian homebuyers don’t pay the modest amount for an inspection report before signing on the dotted line. There are some big risks that come with this gamble, especially when you’re renovating.
When you start pulling off those walls, ripping out cupboards or scraping back old paint, a whole host of hidden nasties can present themselves.
They can be a real Hollywood-level house of horrors.
The last thing a renovator wants is to discover they’ve bought something that needs to be restumped, has termites, requires a new roof, is filled with dodgy wiring and plumbing or has asbestos or lead paint throughout. A pest expert and structural building inspector can sniff out these problems.
Another major issue that rookie renovators miss is rising damp. This is especially common in older properties that are appealing to those looking to breathe new life into a home, such as heritage buildings. Keep an eye out for discoloured paint, mould, bubbling on woodwork around the bottom of walls and signs of excess moisture.
These issues don’t just deliver a nasty surprise – they can cost a fortune and quickly wipe out any future profit from a renovation. Know what you’re getting yourself into before you’re suddenly in the deep end (no ‘rising damp’ pun intended).
The stuff you forgot
You’ve planned the kitchen. Tick. You’ve designed the bathroom. Tick, tick. Every single possible paint colour has been reviewed and you’ve picked the one for you. Tick, tick, tick.
How easy was that! You’re all sorted! Right?
What about light fittings? How about the window coverings? Do you need new electrical outlet covers? Did you remember the towel rails and toilet roll holders in the bathroom? In the kitchen, did you factor in the backsplash or just the benchtop?
Some of these are small expenses but added up can suddenly become overwhelming. You need to anticipate everything.
Look out that big, beautiful window to the backyard and the one to the front. Have you considered landscaping costs?
It’s not as simple as just throwing in a few hydrangeas and turning on the hose. Buyers consider the outdoor space just as important as the indoor in many locations, particularly family friend suburbs or yuppy loved urban spots. It can cost a pretty penny too.
Get a landscape designer around to come up with a plan that suits the future buyer’s needs and wants. Know exactly what’s required and how much it’s going to cost you.
If you’re taking on a more extensive project, have you properly budgeted for all of the required permits? Have you taken out adequate insurance?
Molehills will become mountain if you haven’t prepared your costings to capture all the works.
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Know who you’re hiring
When you head out to find quotes from builders and tradespeople to bring your renovation dream to fruition, do your homework very carefully.
Some of the worst stories I’ve heard involve builders who were unreliable, shoddy or discovered a slew of unexpected costs and delays. You need to be absolutely, 100 per cent sure of who you’re signing up to be part of your team.
Get recommendations from people. Ask for references from recent clients. Drive around your neighbourhood and knock on the doors of renovated or rebuilt properties to get names. Interview them like you’re hiring someone for a new job – because you are.
When the quotes come in, don’t just pick the cheapest. That’s rarely an indication of the best offer. Go through each with a fine-tooth comb and compare every single line item. See if the estimates for materials and labour are realistic. Make sure they’ve accounted for all of the things you want and need.
Think about yourself
For newer renovators or those on a budget, the idea of living on site while undertaking an overhaul is pretty common. Some even believe it’s an almost romantic endeavour – sleeping among the dust and paint chips. Becoming ‘at one’ with the project. Surely, it’s a great way of saving cash and being able to get your hands dirty outside of hours?
But it’s not always realistic. I remember hearing a story at a barbecue from a red-faced renovator who was crashing on the couch while renovating a property but didn’t think to consider a very important aspect – the toilet. They had meticulously planned every little detail of the new bathroom… except what they would do when the loo was out of action. Oops.
If living among rubble and debris isn’t your cup of tea, realistically budget the cost of accommodation for the duration of works. And add at least 10 per cent to account for schedule blow-outs.
Costs you can’t always control
When you’re doing the numbers on a renovation, all of the things mentioned above are critically important. But you also need to have a calm head and expert insight when calculating the really big ones.
That’s buy in cost and sale cost. A buyer’s agent can help you keep the first one as low as possible, meaning the amount you sell for – after your carefully thought out renovation – delivers a healthy margin that makes it all worth it.
A buyer’s agent is also most in tune with what the market is doing. You need to keep this in mind as much as any other project decision, because wild downward movements that occur while you’re renovating will evaporate your profit.
You don’t want to be stuck at the end of it with a property worth the same – or worse, less – than you paid for it several months earlier.
Decide early and often
Perhaps the biggest source of unexpected costs in a renovation is you. The tendency to get partway through a project and make a sudden change is not uncommon. It comes from not being clear about your choices or becoming too emotionally involved.
Decide on everything required before you begin and stick to it. A certain sense of flexibility is needed in a reno scenario but be reasonable. Needing to move the location of a tap is one thing, deciding to flip the layout of a kitchen and add an island when works have commenced is another altogether.
Renovation is not a path ever investor should follow. If you are tempted, don’t go in without solid advice from an expert who can help ensure you’re not about to lose out big time. As buyers’ agents, we’ve helped all sorts of investors and homeowners find renovatable real estate homes that yielded the results they desired.
In fact, making a call to us is the first task you should undertake in any renovation attempt.
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