House Renovation Cost: How to Avoid Renovation Traps & Overspending

hotspotting.com.au and propertyU

Home renovation has become a rite of passage among Australian property owners. but understanding house renovation cost is crucial before embarking on any project.  Fuelled by the popularity of do-er upper shows and the perceived can-do attitude of Aussies, it's no surprise.

But as many people discover – often far too late – renovation projects are not a guaranteed profitable exercise. There are plenty of challenges to overcome and risks to consider when renovating an investment home.

The key is identifying well before you sign a contract to purchase whether your renovation prospect is a treasure or a trap.

The allure of renovation

On the face of it, an unrenovated property can be a desirable proposition. You are getting a home at a bargain price. Sure, it needs some TLC, but the savings on the buy-in seem extraordinary when compared to other properties.

Then there's the emotional journey of imagination. Take a walk through the home and you find yourself staring past the dingy floor coverings and sloping floor line. You picture what it will look like with the hard work done (ignoring the hard work part, of course). It will be a masterpiece of your making to show the world!

Speaking of hard work... how tough can it really be? A whole host of underqualified influencer wannabes have been swinging hammers on home renovation shows in Australia for decades. Surely if they can do it, you can?

But there’s a reno reality you must face.

Let me first be clear _ it’s not that I’m against renovation prospects, but there are realities about the process you must understand to ensure you retain your sanity and finances.

First up, the cost of materials remains high in today’s market. Post-pandemic price rises have not retracted, and while many say materials costs have stabilised, they are unlikely to fall. Add in that now it's labour costs which are ramping up. High demand for tradies and skilled workers means that carpenters, plumbers, tilers, and electricians can just about name their price in today's market.

The other element is how long it takes to get a project done. As they say, "Time is money", and there’s nowhere else it’s more true than in real estate. Holding onto a property – especially servicing a loan – is expensive, and the longer it takes to complete the renovation, the more your funds will deplete.

Not too many years ago I was talking to a valuer who said they'd apply replacement costs to detached homes of around $2000 per square metre. Now, they are running at $5000 to $6000 a square metre for a nice, liveable dwelling.

Another cost that few people factor in is hidden charges, such as council fees, design professionals and certifiers. These add thousands to a project.

Not so long ago, internal renovations where you might refit the bathroom, kitchen, floor coverings and painting could be done for around $60,000. I'd suggest that the same works have doubled in price for most folks in today's market.

The most significant risk in renovation is overcapitalisation. This is where the cost of the work you carry out on a home exceeds the value that the work adds to the home.

For those who are going to live in the property for a decade or two, this is less of a risk. Long-term capital growth will help offset those cost overruns.

However, if you hope to sell the property at a profit, then overcapitalisation can kill that dream.

Avoiding overcapitalisation takes skill. You need a thorough understanding of the market you're in and what buyers expect in a home. You must know what the “ceiling price” is likely to be in a suburb. Will buyers in your suburb pay tens of thousands more for Calacatta Marble benchtops in a kitchen? Perhaps... but unless you have a professional level understanding of the area you're renovating in, it will be tough not to overspend.

Property professionals are looking at each element of proposed upgrade work and saying, “Is this cost justified in this market?” Being able to do this takes expertise and skills built over many years.

Choosing the right renovation prospect

When looking at the feasibility of renovatable properties as a profitable or worthwhile project, there are several elements we buyer agents look for.

Firstly, there’s location. Is this an area with property values that will tolerate and reward upgrade work? Are there enough buyers at the right price point to compete for a completed renovation? Is it a location with good capital growth potential?

Then there's the property itself. Will it require relatively easy cosmetic renovation, or more involved structural work? You need to ensure you're getting major bang for your buck if you’re undertaking major works like changing room layouts, raising and building under, or extending an existing home. Get solid advice from a reputable builder as to the cost and extent of work needed before you commit. If you don't do this due diligence, you could be in for a very nasty financial shock.

This leads to a thorough financial analysis as well. Please take into account everything – and I mean EVERYTHING – when allowing for costs. It's not just the contractor's work. There are council charges, professional fees, certification, and planning outlays. Then there are holding charges -- are you servicing a loan on the property while doing this work? You also need to pay for utility connections like electricity and water.

One cost many don't factor in is their own time and effort. Developers call this their profit margin – it's where you earn something for taking on the risk of the project.

Then, you must do a market assessment of what the home might be worth once the works are done. You'll have heard the phrase, "Cost doesn't always equal value". This is where that rubber meets the road. Work out what someone might pay for the completed home by comparing it to similar homes that have sold in your area recently. Does this end value exceed the total cost to you? If it's a yes, then it could be a goer.

When to buy a completed home

In the current high construction cost environment, I often see people paying a premium for well-renovated homes that require no additional upgrade work. Most buyers will deem it worthwhile to avoid properties that need an upgrade and instead, look for a move-in-ready abode.

This is entirely understandable in today's market. You get to avoid all the stresses and strains, open the door, and enjoy the home. I've seen this particularly with specific buyer demographics, such as time-poor professionals and family buyers. It simply makes sense in their situations to avoid any renovation grief.

The key is understanding exactly what you need from your next home or investment and determining whether a simple upgrade will fulfil those needs in a way that makes sense to you, and within your budget.

And the best way to do this is by having an experienced property professional on your side. Buyers' agents have seen it all before. They know their market inside out and can quickly assess whether a renovator is a great option or something to avoid.

When you are next in the market searching for the right home – even if it requires a little bit of effort and attention – make sure you rely on the guidance of a specialist buyers' agent. We stand ready to ensure your next dream home isn't a renovation nightmare

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