How to finance property renovations to increase the market value of your property?
Renovating for profit is all about home improvements which continue to be popular among Australia’s property owners. Renovations are a great way to add value to an investment, especially houses which are purchased under market value or cheaply.
What are your renovating for profits goals? You want to understand the strength one focused strategy offers you:
- Buy under market value
- Research ways to add value
- Diversify strategy when profitable
- Take advantage of capital growth
What’s the best or most effective way to achieve your goal? What if you buy in an area predicted for strong capital growth and buy property where you can value add?
Renovating for profit, there are three main strategies which can be achieved:
- Demolish and rebuild
- Renovate and extend
- Refurbish and redecorate
Renovating is also a smart way to increase the standard of living for a property you are living in because simple cosmetic improvements can add value quickly and could add ten per cent to value of the house.
Renovating for profit if you’re taking the first option of demolish and rebuild because this depends on land value and location as property is underpinned by value of land. The further away from public transport the less the value of the land.
When building a new home, neighbours are an important consideration, its important the design fits in with the existing streetscape.
Renovate and extend, family rooms leading to outdoor entertaining areas are popular extensions these days, however the reality is major extensions and structural renovations can be as expensive as building a new house.
The third option refurbish and redecorate involves working within existing walls for example remodeling or replacing kitchens and bathrooms so its relatively simple as there are no major extensions or renovations in the plan.
Financing your renovation…let’s start with home equity loan which is a common way to borrow money for renovations. Bank lends money against the value of your home. If your property is worth more than amount still owing, that amount is the equity in that home.
Banks are usually willing to lend up to eighty per cent of loan to value ratio (LVR).
So if your property is worth $530,000 on the market: amount owing is still $330,000, bank can lend you around $160,000 which is eighty per cent of the $200,000 equity held in that home.
What if the cost of your renovations is going to be more than the amount of equity currently in your home? You might be able to take out construction loan against predicted value of your home once the new constructions are completed.
In previous example, if you wanted to renovate to the tune of $200,000 the bank would be willing to lend in a home equity loan would fall short. What if value of the home once renovations are completed is estimated at $820,000 instead of pre-renovation $530,000?
You could apply for a construction loan at around eighty per cent of the amount, of the $420,000 of equity in the home. This would give you access to $336,000 construction loan.
To cover risks in a construction loan, most financial institutions or companies don’t pay out entire loan upfront because its done in phases as needed in construction ensuring money is going towards making the property more valuable, instead of something else.
If you’ve only just purchased your property and it holds no equity, you can take out a personal loan to fund the renovations. Personal loan would generally be for smaller scale renovations typically around $30,000 or less. The drawback is higher interest rates…
An emergency option for a minor renovation could be a credit card. Credit card finance is comparably easy to get, however it comes with the risk or temptation might be to spent on something else or minimum payments are not kept on track.
Bear in mind interest rates on credit cards are higher than other options.
There is no time limit so payments can be made to suit the credit card holder. Keeping payments low and stretching time it takes to pay back credit card however costs much more in the long run because of escalating interest payments.
Renovate or not renovate? If you want to borrow for renovations for your property, you need to work out two factors:
- Do renovations definitely increase value of property to the level you expect?
- Can you afford the repayments?
- Renovating for profit, a property which is worth more is more expensive if you can’t pay back loan…
If the answer to these three questions is yes, you want to plan the renovating for profit strategy, which matches the best finance option for your home improvement…does that make sense?
Renovating for Profit