Expert Advice with Todd Hunter. 05/06/2016
It’s a common question I am asked all too often. Should I renovate my home or should I invest?
There are a number of factors that need to be considered before making this decision. So looking at this scenario it is easy to see why so many people lean towards renovating their home.
The issue with going this way is that I am yet to see a renovation on someone’s home stick to budget. In fact I could quite easily say that most of the renovations I see occur on clients & friends homes actually come in above double the original figure.
And I throw myself in on this equation. I am currently two thirds into my own home renovation and as an example, my pool renovation of $30,000 came in at over $80,000. Now don’t get me wrong the pool, deck, day bed and fencing look absolutely awesome, but the reason it was almost triple the price was due to extensive research into new products that not many people in the country were using. Yes I wanted a pool that nobody else had. And yes all this came at a cost.
Now when renovating your home, lifestyle generally comes first before budget. So with this in mind, you spend more than expected and this money generally comes from an increase in your mortgage limit or from redraw or your Offset account. Whichever way, this increases your home loan balance and also increases your loan repayments. Now if you do a good renovating job and the market conditions are favourable then your property should increase in value too. You really should be looking for at least 2:1 ratio as an increase. Meaning if you spend $1 then you want your home to increase in value by $2. And $3 is even better.
From experience, those who renovate home don’t then go onto investing afterwards as their cash flow has decreased to the extent where they don’t feel comfortable doing so.
But what’s the alternative, stay in your home as it is and invest in an investment property or two. This option is a no brainer for me. Only because I have been there and seen the benefits of the outcome. By investing correctly and having multiple properties increase in value, you will increase your net worth much faster than with one property. That one property, being your home, will mimic what that one property cycle does. Multiple properties in different locations will allow you to diversify and take advantage of different property cycles.
Going back to my earlier comment about renovating my home. Now I don’t increase any loan to do this, I sell an investment property here and there. And use the profits to pay for the renovations with cash. This doesn’t increase my cash flow at all, as mentioned above, but it does increase my equity position. And I don’t stop there; I replace each sold property with two more properties. Sure I have started the investing cycle again on the latest investment purchases but my income can be used to put all my extra cash flow into the Offset account to get ahead quicker.
Small sacrifices now for much bigger gains later.
There is also a second benefit to going with this strategy and that is to learn how to renovate on an investment property prior to renovating your home. Think of it like trial and error. Because I can tell you that you don’t get renovating right first go. Guaranteed you will go over budget, probably even double or triple along with take 3-6 times longer than you should.
This happens as unintentionally you will let emotions get involved rather than making the property look great on first appearances. You will also learn a bunch of tricks of the trade and learn how to co-ordinate your tradesmen in a more timely manner. It really needs to be treated like a business. Time is money and mistakes are costly.
In relation to what budget you should be aiming for, I like to stick to 5% of the purchase price as a maximum. That will mean that you need to do considerable amounts of the work yourself to keep labour costs down. And the more you do, the more you learn. Embrace it, before you tackle your home renovation.
Todd Hunter is director, buyer’s agent and location researcher for Sydney-based wHeregroup. He is an active property investor himself and amassed a portfolio of 50 properties by the age of 31. For more of Todd's musings, visit the wHeregroup blog.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.