Property Investor

I went to a cocktail party at a friend’s home last weekend, and met a friend of hers for the first time. And you know how it goes… “What line of work are you in?”“Property” I replied. Well the first question she threw at me was “Should I renovate my existing house or buy land and build a new house?” Well it’s not the first time I have been asked that question and in fact I told her I had just been called to someone’s house in her area to give advice on this specific question.

The way I see it, you have to weigh up your options. Firstly, if you can add value to your existing property and not over capitalize in your specific area and you can achieve the outcome you desire, then renovating is an option. What’s important is that after the renovation you should be able to get your money back. The value of your house should increase by the amount you spend. This works if you are able to get your existing house to meet your current needs.

When considering a renovation it is important to also be aware of what your neighbours in the street/area are doing. There is no point of renovating your house to a point where it becomes the best house on the street but also the least affordable in your suburb. You also have to take into account that perhaps there is a price ceiling in the area.

Unrelated but worth a mention here is ‘location’, and this is a very important part when buying real estate. My rule is when buying property, buy in the best location you can afford i.e. Location Location Location! You will make more money this way. It is better to own the worst house on the best street then the best house on the worst street. You can always change what a property looks like but you can’t change the location! So if you are in a great location already, there is definitely a strong swing towards renovating.

Remember, the cost of the stamp duty you paid when you purchased the house is a sunk cost. Also, if you consider the stamp duty you would have to pay on a new house or land you purchase, this lump sum of money which will again become a sunk cost could be used to renovate and add value to your existing home. It may not be enough, but it’s a start. By using this option it may give you the outcome you desire and require, spending the least amount of money. Hold this thought for a moment.

On the other hand, let’s look at buying land. If you buy a block of land rather than an existing house, you pay a stamp duty on the land component only, not on the house you are building. So there is a stamp duty saving, however, you have to factor in other costs: holding costs of the land whilst building, the cost of renting whilst you are building and perhaps other fees such as architects etc.

Generally, how it works is that houses depreciate and land appreciates. For the past 10 years property prices have gone up. Therefore if you bought property you have made money. If you build a new home on a block of land, at the point of completion your house is worth the cost of it plus the land. As the years go on though and the finishes in the house become dated, the house does not have the same value as a new home.

However, 10 years down the line your land component would have steadily increased. And that is why after 20 years the next person might knock down the house because it’s almost cheaper to start again unless the house has fabulous bones. Often, solid brick homes are great to renovate like the old 60s and 70s. They are so out that they are now in fashion.

My rule of thumb when buying land is: the amount you spend on your house should be roughly the same value as the cost of the land you purchased. For example, if you buy land for $700,000 you should spend about $700,000 building your new home. This way, you are ensuring your house will appeal to buyers in the suburb when you are ready to sell. It’s a simple rule but ensures you don’t over capitalise or potentially build something that the next owner will want to tear down.

There are no hard and fast rules and at the end of the day you have to make the decision, but the young wide eyed lady I was chatting to had called in a QS to price up the renovation vs. the rebuild. And guess what he came up with… to renovate cost $1.1 million and to rebuild a new home on her existing land cost $1.2 million. So there you have it. Not much in it unless you value the old beauty of your existing home.

It is a good idea to call in a few so called experts to get an idea of what your options are. A real estate agent can give you an idea of what the current market price is and maybe what it will be worth after the renovation. An architect will give you some idea of what you can build and what a new home will cost. You do need to have the facts to be able to make a decision that you are comfortable with. Clearly there is no right or wrong but it’s worth being 100% comfortable with the decision once you have made it. Do your homework!

Property Investor and their contributing authors have made every effort to ensure that the information is free from error, neither Property Investor nor its contributing authors make any representation or warranty as to the completeness or accuracy. Readers must decide if this information is suitable for their personal situation or seek advice.