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Renovation

The renovation strategy involves adding value to a property in order to onsell it at a higher price.

Renovations may be as simple as cosmetic improvements (e.g. painting, floorings, etc), or as major as extending or altering the property in some way.

Ways to add value

There are many ways to add value to a property. Some of the popular ways include:

• Cosmetic improvements (paint, floorings, curtains, etc)
• New or upgraded kitchen or bathrooms
• Adding a bathroom or bedroom
• Outdoor living space
• Indoor / outdoor flow
• Garaging
• Adding another dwelling (minor dwelling, granny flat, sleepout)
• Converting a property into multiple flats

Costs involved

Renovations need to add more value than they cost, as there are a number of other costs to cover in the process:

• Acquisition costs (legal fees, building inspections, LIM reports, etc)
• Holding costs (loan interest, rates, insurance, etc)
• Improvement costs
• Disposal costs (legal fees, real estate agent commission, home staging, etc)

It is typically expected that renovations will add at least $2 in value for every $1 spent, although it often needs to be well in excess of this ratio to cover all of the other costs.

Traders seek to minimise as many costs as possible in order to maximise returns. Some ways to minimise costs include:

• Arrange access to the property prior to settlement to begin improvements (prior access clause in Sale and Purchase Agreement)
• Seeking trade discounts on products
• Buying products second hand
• Selling the property privately

Legal Considerations

Simple cosmetic improvements can be carried out by anyone without restrictions. However most other renovations will require building consent (and maybe resource consent) from the local council. Without such consents it may not be possible to sell the property and insurance policies may be invalidated.

Financial Considerations

It can be difficult to arrange finance to purchase, renovate, and onsell a property as main stream lender typically do not like the short term lending, and mortgage brokers receive little commission (and may even have it clawed back) for short term lending. Ways to arrange finance include:

• Privately (from friends, family, business associates)
• From 2nd tier lenders (not mainstream banks) although interest rates will usually be higher
• Through a revolving credit facility secured against other properties

GST is a consideration for renovators as well as other property traders. Renovators usually elect to submit GST returns monthly which allows GST to be claimed when the property is purchased, and paid once sold. Receiving a GST refund soon after purchase can minimise holding costs and/or fund the renovations.

Inland Revenue often require evidence in support of large GST refunds which can slow the refund process down, meaning the funds may not be available until much later in the project.

DIY versus Paying Tradespeople

Some renovators enjoy doing the work themselves, whilst others prefer to pay others to carry out the work. Both approaches can work successfully. Considerations in deciding the balance of DIY versus paid work include:

• Desire to be hands on versus hands off
• Time availability (own, and that of tradespeople)
• Project duration
• Specialist skills required
• Quality of finish required
• Profit margin
• Cost
• Tradeoffs (lost family, social or recreation time. Time to find the next property)

Related Links

Environmental and Ethical Considerations
Property Talk discussions on renovations:

• http://www.propertytalk.com/forum/showthread.php?t=13845
• http://www.propertytalk.com/forum/showthread.php?t=3822

--Monid 04:02, 31 December 2007 (NZDT)