For savvy property owners, renovation decisions are governed by cost and added value. A good model to follow is for every $1 you spend on renovating your property, try to add $3 to the overall value of the property.
While this may be easier said than done, it can be helpful to break down the cost of renovating a property into smaller numbers. Throughout this article, we’ll identify ways to add spend strategically to ensure you are renovating for equity, not preference.
The Equity Formula
To begin with, it’s important to understand what we mean by equity. Let’s imagine a property is purchased for $200,000. The owner spends $20,000 renovating the property bringing the total cost to $220,000.
However, if the $20,000 worth of upgrades add $50,000 to the valuation of the property (taking it to $250,000), then we can subtract the total cost from the new valuation to leave us with the equity. In this instance, we would be left with $30,000 of equity.
| Home Purchase Price | $200,000 |
| Total Price w/ Equity Investment | $20,000 |
| Total Purchase Value | $220,000 |
| Value After Equity Renovation | $250,000 |
| Total Equity Return | $30,000 |
It is important to point out that there are other costs associated which may vary depending on your location. For example, in some countries, stamp duty must be paid which can vary depending on how many other properties you own.
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Formulating Home Improvement and Remodeling Ideas
To generate such ideas, consider your living habits, your aesthetic preferences, and any functional changes that could enhance day-to-day life in your home.
How To 3x Your Costs
When we talk about spending a dollar to add 3, we’re referring to adding $3 to the valuation of a property for every one dollar spent on renovation.
Here are four ways to achieve this.
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Efficient Upgrades
The value of a property can jump significantly when you turn obsolete space into usable space. This can often result in a property having an extra bedroom, a second bathroom or just a better layout in general.
If you’ve ever house hunted, you’ll probably be aware that property prices jump in line with how many rooms are in the house. In fact, it’s common to search for houses based on the number of bedrooms and/or bathrooms.
This is simply because, generally speaking, there is a positive correlation between the number of bedrooms in a property and the valuation of the property.
A great example would be taking a property with three large bedrooms and carrying out renovations to transform one of the bedrooms into two small bedrooms that could be used by children. This way, the property could be taken from one that appeals to families of four to families of five.
While it’s impossible to put an exact figure on these upgrades without more context, you can expect the difference between a three and four bed home to be between 10 and 30%.
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Unlock Underutilized Space
While most people will focus on the cost of a property per m², it can actually be better to focus on market value per m². This ensures that as much space as possible is contributing to your home’s market value. Start by considering any spaces that could be used in a different way.
For example, a garage may seem practical, but if your home has a driveway too then this space could be converted into a home office, gym or playroom.
This could easily cost upwards of $10,000, but in terms of property value, families may be prepared to spend over $30,000 for a home that comes with a ready made playroom.
Similarly, young professionals who work from home may be prepared to spend similar amounts for a property with a luxurious office space that is separate from the rest of the house.
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Repositioning the Property
Another hack for adding value to property comes in the form of repositioning the property. This isn’t necessarily about how the upgrades improve efficiency, but more about how they shape perceptions. Simply put, buyers are prepared to spend more on property that encapsulates modern trends.
Currently, there is an increase in the number of young professionals working from home so redecorating a home to take it from a dated family home to a modern professional home that is designed also as a remote working environment.
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Final Thoughts
There are so many more ways you can add value to your property, but the tactics mentioned above are tried and tested.
To get a clear understanding of how much value you have added to a property, it’s useful to get a RICS desktop valuation before and after your upgrades.
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Image credit: renovating for equity by envato.com
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