Irrespective of why you choose to renovate your own home,
the most important underlying factor must always be the enhancement of its capital value.

                                                             ~~~O~~~

The writer of this article is a CPA of Australia. He has worked in one of the Big-3 international Accounting firms and has developed and renovated numerous residential properties in Australia.

As I write this article, home owners and real estate investors are facing the most challenging times in the history of home ownership in Australia.

Real estate prices are trending at historic highs in Sydney and Melbourne, two cities which I consider premier and the most cosmopolitan in this country. National wage growth is practically stagnant while household debt to income ratio is riding precariously thin. And despite a string of rock-solid economic credentials – inflation of less than 2% per annum, unemployment rate averaging at a respectable 5.5% for the last four years and annual GDP growth of around 3%, interest rates are at 60-year lows of 1.5% and is forecast for at least another cut in 2017.

Notwithstanding the fact we like to change prime ministers like we change BBQ sets every couple of years, the political system is stable and robust as it should a developed nation like ours. Australia is also a $1.6 trillion economy which is inextricably linked with the dynamism of China, the new upstart that is increasingly determined to flex both her soft and hard political muscles in the Asia Pacific region.

The fallout from these factors is a generation of aspiring homeowners destined to become life-long renters in a vast, land-abundant country they call home. For this group of young people, the Australian dream of home ownership is being shut out with each failed attempt at weekend auctions dominated by cashed up investors and baby boomers.

For those already in the property market, doing nothing might seem like a safe option to avoid costly mistakes that might come with real estate investment. But in an economic climate where Australia is poised to reap the rewards of being in one of the fastest growing regions in the world, sitting idly on a pool of untapped equity built-up in your own home might prove to be the costliest mistake of all.

I am currently embarking on major renovations to my own home and have read countless home renovation articles advocating a host of reasons for an upgrade – to gain a higher sale price, to restore style and character, to install green and eco-friendly design and appliances, to increase functionality and comfort, to makes more space for children not wanting to move out, to remodel a kitchen or bathroom that need a serious makeover and the list goes on and on. For me, all these reasons must imperatively point towards a sole, all-encompassing factor – to enhance the capital value of your home.

Home decor gurus and interior designers often advocate renovations to enhance lifestyle and instill cutting-edge design. A good renovation is one where capital enhancement is a consequence of good design and functionality.

So here are my top 5 reasons for renovating your own home:

1. Enhance the value of your home

2. Capital gains are tax-free

3. Borrowing costs are at a 60-year low

4. Australians are passionate home renovators

5. Enhance your lifestyle

1. Enhance the value of your home

I believe this is the most challenging of the five reasons for renovating. The idea of what might enhance my home could be very different from that of another home owner. The key is understanding the demographics of the suburb and its eventual buyers, be they professionals, families, transient occupants, empty nesters and so on.

For example, my own research over a period of time shows the average home in my suburb has 3.83 bedrooms, 2.62 bathroom and 1.94 car spaces. Hence, I bought a 3-bedroom, 2-bathroom house that has all the “right ingredients” of being able to be upgraded to a 4-bedroom and 3-bathroom house with 2 car spaces. The key is turning unusable space into higher value use to create immediate value. This could involve transforming a dated formal dining area or a unused corner into an additional bedroom, large laundries into bathrooms or a sun room adjoining a bedroom into an ensuite.

By far the most impact is achieved by well-designed bathrooms with good tapware and a modern open kitchen which so often defines the heart of a home. Seamless entertaining areas that blur the lines between indoor and outdoor spaces will always hold its appeal.

2. Capital gains are tax-free

It may be argued capital gains are a consequence of good renovation rather than a reason to renovate.

But with real estate prices at record highs, upgrading your own home for the specific purpose of creating new equity / capital gains might seem like a logical strategy.The new equity created from renovating a principal place of residence is also free of capital gains tax in the event of an eventual sale.

Renovating, as opposed to selling also ensures you don’t sacrifice hefty stamp duty paid on acquisition and expensive incidental costs such as agent, solicitors and marketing fees associated with a sale.

Capital gains created from a well-executed renovation can cut years and hundreds of thousands of dollars off your mortgage repayment.

3. Borrowing costs are at a 60-year low

Although lending guidelines have tightened considerably in recent times, the Reserve Bank of Australia’s official cash rate has remained at a 60-year low of 1.5% per annum.

The majority of home loans with major lending institutions come with an offset account where additional funds in this account is offset against the loan amount owing when calculating interest costs. While negative-gearing is one way to minimize tax payable on investment properties, recording an annual tax loss is only suitable for certain types of investors and certainly not the most ideal.

Low borrowing costs on an owner-occupied home coupled with excess funds parked in an offset account minimize will mortgage payments which are not tax deductible.

Staying in your own home whilst it is being renovated might cause some temporary inconvenience but this will save you thousands of dollars from renting a property elsewhere.

4. Australians are passionate home renovators

There is a reason organisations such as Bunnings and a host of building products businesses are recording strong growth each year.

Australia has a proud tradition of recognizing excellence in tradesmanship and a strong vocational system in producing good quality tradesmen for the building and construction industry. This has contributed to an industry of honest and professional builders who can transform your renovation concept into reality. Home builders often market themselves as builders of dream homes.

DIY enthusiasts need to ensure their handiwork is at least on par with the professionals. Nothing is more glaring that low quality finish that not only fails to fetch market value, it might well devalue the house and involve valuable funds to rectify. But whether we do it ourselves or engage a builder, building that new outdoor deck with a swimming pool or a second storey seem to be one of our favourite past times.

5. Enhance your lifestyle

For me, this is the weakest of reasons to renovate your home despite all the glossy magazines and reality TV shows on renovations about enhancing a property for lifestyle purposes.

The single biggest mistake a would-be homeowner can make is buying the wrong type of property in a wrong location.

Granted that well-executed renovations in so-called “lifestyle” suburbs such as Balmain, Potts Point and Paddington in Sydney or Brunswick, Brighton and St. Kilda in Melbourne often yield significant equity.

It is also important to distinguish between mere cosmetic renovations from extensive structural ones where the latter are obviously designed to yield much higher returns. General guidelines apply where structural renovations in locations greater than 25 kilometres from Sydney and Melbourne CBDs may not yield desired returns due to lower property prices. Conversely, a simple cosmetic renovation in a lifestyle suburb might deliver handsome gains. Though there are no hard and fast rules, following certain tried and tested guidelines from expert renovators can certainly minimize costly mistakes.

The thing to remember is handsome profits are not made from a well-executed renovation sold to a buyer willing to fork out significantly more dollars than what the market dictates.

Rather, capital value is created from in-depth planning and sound research the moment a good property is purchased even before the first renovation brick is laid.

So dear readers, what do you think are the most compelling reasons to renovate your home?