Practical Property Series: Renovating to add value?
The following podcast recording was inspired from a question recently received from a subscriber to the show. If you have a question that you'd like me to have a go at answering, please reach out on darcy.ungaro@nzeverydayinvestor.com
Myth, madness, or just good method - does the practice of renovating a property ever add value?
Myth: Renovations can 'add value' to a property...
First, a quick note: This episode is opinion only - you may not agree with a lot of what I'm sharing here, especially if you haven't renovated or build a home before. In many cases, people successfully complete builds and renovations all the time, and with great success too. The amount of risk, that home-owners take in completing renovations, however, can be much higher than they realize. Like anything, if you're taking a risk, you need to know that the magnitude of the reward is worth it. With renovations, the relationship between risk and return is extremely murky indeed!
In most cases, renovations don’t add value to your home, beyond the amount you’ve spent on getting the job done (if you're lucky). When you overlay other expenses like time off work, loss in productivity, and other non-financial expenses like stress - the cost can be huge. Is the benefit really worth it? Is this renovation more about scratching a 'mid-life crisis itch', perhaps a manifestation of your desire for more - is it really a good idea?
"Renovations have to 'add value' as I’ve watched people all the time do it on TV!"
Hmmmmmm... When you bought the place, the location, size, proximity to school zones, but most importantly, the potential, was already factored into the price you paid for the property – This is why, in reality, it's rare that people make a profit on a renovation.
In this podcast we discuss:
-Renovating a rental property
-Property flipping
-Renovating your home
Normally during the renovation (which can last a couple of years!), there’s been an appreciation in the value of the land. Let’s be honest, it’s the land that your home sits on, where the value is – and in a rising market, often the renovators take credit for the work the dirt does on its own. The dwelling’s a liability!
Renovations involve a lot of money and could dramatically affect where you end up in retirement. Unless you’re keen for some pain and stress (not just on yourself but with your partner), think twice about doing a big renovation on your home. With investment properties, unless it's increasing the rental income, why would you even bother? With property flipping, are you really able to add genuine value during the period of time that you're going to own the property for - ensure that you're not 'ribbing' the future purchasers of the potential to profit themselves - opportunity adds value to a property, so don't take that away.
You've likely heard this truth before – it will cost twice as much and takes twice as long compared to what you’re already thinking.
If you're into property, don't focus on the metal and wood too much - it's the land that builds the wealth. The dwelling is just a tool to aid in owning the land over your investment horizon.
