Renovations – Part 2: Planning for success and insights from the federal budget (Ep.70)

In this week’s episode, Dave, Cate and Pete take you through:

  1. Budget 2020 and the property market. The trio share their thoughts on key federal budget measures that will drive the economy and property market. From tax cuts, providing perspective on national debt levels, to identifying the market segments that have missed out on further government stimuli.
  2. Homes that you can grow into. Unfortunately it’s often the case that the home we desire and can afford don’t exactly match up. The compromises are normally between the dwelling and the location. To get into your preferred location, considering purchasing a home that you can grow into by extending out or up is a plausible option for many – the trio share with you the key benefits of this strategy.
  3. Top tip – live in your home before you renovate. Get to know your property! After living in your home for some time, you’ll find out what you love and what you would like to change. This will save you from making some renovation decisions that you later regret.
  4. Home renos – how will the renovation impact your ability to sell?When renovating your home, thinking about being able to sell it down the track, (after the kids have grown up and moved out) is not usually the first priority. However, having an understanding on the future saleability and likely buyer pool can help you make critical decisions on your renovation ideas.
  5. Investment renos – understanding your deductions. We always say that tax deductions are the icing on the cake, but you should still have an understanding of the tax implications of the works you plan to complete. Various materials and appliances will have differing depreciation schedules. Speak to a quantity surveyor to find out what tax benefits you are eligible for.
  6. More bedrooms doesn’t equal more value. Proportionality is critical! Adding a few extra bedrooms doesn’t always add up to more value if you don’t have the space to pull it off, or if you don’t have the living areas and bathrooms to boot! The key is to know your market and deliver what tenants or prospective purchaser’s desire.
  7. Speaking of bedrooms, size is important!Hands up who has been to an open house inspection advertising 3 bedrooms, only to find out on arrival that it’s actually 2 bedrooms and a study? Almost everyone. We share with you our tips on minimal bedroom size – anything smaller, is a great home office or a baby’s nursery.
  8. Granny flats. The capital gains tax incentives in the federal budget provide incentives for families to house their elderly parents in a self-contained unit. But do granny flats add value?
  9. And of course, our ‘gold nuggets’

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Federal budget update – the Property Planner, Buyer and Professor’s insights

  • Although we’re taking on extra debt 500 billion, because interest rates are so low, the interest expense is going to be lower than what it was in 2018. Interesting pieces of data that isn’t’ readily spread in the news, they talk about how much debt we have, where it’s going, why it didn’t support childcare. But the actual interest expense will be lower than 2018.  
  • Surprised at the tax cuts – a lot of social issues to focus on and I wasn’t sure about that. I’m all for injecting some positivity and getting people spending. When you give someone a little bit of money, they’re likely to give themselves a treat, when they have something substantial, they’re likely to do something else, put it in the offset or on the loan – they won’t spend it.  
  • Absence of anything to stimulate first home buyers, all we’ve seen is an additional 10,000 places for the saver scheme. These recipients have to buy brand new to get it and that’s a shame. The land to asset ratio is not favourable when you buy brand new. It’s encouraging people to buy something that will not perform as well. Granted the government is not trying to help people to build wealth, they’re trying to get them to purchase a home.  
  • Changes to responsible lending, when this filters through, we’ll see borrowers being able to get their hands on more money, and with tax cuts some people will have significant bonus money, which will stimulate investment again.  
  • Ease of borrowing, being able to borrow more money and the additional tax cuts = strongest trifecta for property growth.  
  • On the ground, we’ve talked about and witnessed many finance cycles – it changes incrementally. Even though responsible lending laws will come into place in March, the banks will start changing their behaviour beforehand. We’ve received communication from Westpac that they will be reducing their assessment rate from 5.35% to 5.05% – that is by 30 bps. That is a significant adjustment that will increase borrowing power – the other majors will follow soon. 
  • Australian property prices have shown that they’ve been very resilient, we’re going to see property prices go up again. Pete’s prediction is that what-ever property price falls we’ve seen so far – that will be it. There won’t be any more. Ring the bell! There is no fiscal cliff in March.  
  • Another lender policy that shows things coming back online – Westpac is now offering packages to medico sector where you can borrow up to 90% without paying LMI – we’ll see these little changes to policy that will get lending back online.  

Show notes:

  • Home renovations 
  • If you’re planning to purchase the long-term home – consider buying a property that you can grow into. That can help you get into the location that you want to be in, before you have the affordability levels to buy your long-term home. It minimises the compromises on the location and you can get in earlier in life. Selecting the property you can extend or grow up, without fundamentally changes the bones.  
  • You can expand your living space: a renovation can also allow you to create more space – extended out or up – ideal for growing families and avoids the high in and out costs of selling and purchasing property. 
  • Cate’s renovations – purchased a 1875 property with heritage overlay – bluestone underneath. There was a lot of work to do with council, engineering specialists, heritage consultant and neighbours – we spent 27% of renovation budget on getting out of the ground, on paperwork and consultants. None of this added to the physical project, it just enabled us to do it. Considerable renovation – we moved out for a year. Lived in it for 5 years first and thought about what we really wanted. We love being tucked away in a lounge that is separate from dining and living, we pushed back and protected our lounge, didn’t do open plan. Living in it first and figure out what you love and what you would change. 
  • Dave’s renovations- We’ll still have two more stages, haven’t extended the footprint – two semi detached that we joined as one. We lived in one of them – the previous owner had plans to go up, and other semis in the street had gone up and extended, so we knew we could grow into it. We were fortunate the property next door went for sale for the first time in 40 years. If someone has stayed there for a long time, it’s a good sign that the property has a good feel. We lived in the first one for 8 years, we’re living in it while we’re renovating. Already spending the money in our head for phase two.  
  • Pete’s renovations – renovated the same property twice – did an extension first, extra bedroom, extra bathroom and living area by extending out the back. The second renovation was to extend again – add two more bedrooms on the front – ended up with 6 bedrooms.  
  • Thinking about the market – the first renovation added the most value – there are plenty of people looking for 4 bedrooms and who want 2 bathrooms and 2 living areas. But there are not that many looking for 6 bedrooms. The family that bought it had 4 kids, but not that many families do. If you’re looking to make money you need to think about the end buyer, but that’s very hard to do if you’re living in it and thinking about yourself.  
  • If you overcapitalise on your own home but plan to stay there for the long-term you’ll get your money back after 10 years. If your family is happy living in your cosy home, then that should be worth it. 
  • Investment property – benefits of a renovation
    • Potential increase in value well beyond the expenditure. 
    • Increase rent 
    • Enhance depreciation tax deductions – you used to be able to depreciate everything once you purchased an investment. But in relation to fixtures at fittings, you can only depreciate what you pay for. Putting in brand new bathrooms, floor coverings, ovens, etc can add to the tax benefits. Carpet v timber – make a decision that is tax favourable – there is no point over specing the house or going out on a limb – do you understand the tax deduction – Carpet depreciates over 8 years, Timber depreciates over a different rate.  
    • More budget-friendly 
    • Superior tenants 
    • Tenant longevity 
  • Future saleability 
  • People have an idea that the more bedrooms = better, but if you have more bedrooms with insufficient bathrooms, living or outdoor area – you’ve actually compromised the property, it’s hard to sell or it has only a tiny buyer pool. Rule of thumb is that once you hit three genuine bedrooms, you need an ensuite, definitely if you’ve got 4 bedrooms. And you definitely need a second living area and you need to have a backyard, doesn’t need to be massive, but not just a deck.  
  • The mass market for a home is 3 to 5 bedrooms, you need to make sure the living, the study the bathrooms, yard side is proportionate, you’ve also got to think about – there’s no point having 4 or 5 but then 2 or three of them are really tiny.  
  • What is the standard expected bedroom size in the market you own? Cate’s black book – 2.8m you can have a double bed with side tables – when it’s less than 2.6 it’s a nursery or study or a compromised bedroom. Over 3 is really good.  
  • Granny flats 
  • One of the ways government has tried to encourage is to offer CGT exemptions for granny flats – apply from July 2021. The legislation will cover agreements due to family relationships or personal ties. When you sell the asset there would have been CGT payable, but they have decided that to be CGT free – but only if you have a family member or someone close to you living in the property, or permanent disability.  
  • Do granny flats add value? When you’ve taken away the backyard, unless the buyer has specific use for it (has a granny or an older child), it’s not that great. A bungalow can be great for someone running a business from home, but in a lot of cases, people get excited about the ability to have a tenant and additional cash flow, but then you’re talking about a dual tenancy, which requires council permission – you need to separate the water metre and power, or you can’t pass on usage to the tenant. You’re changing the house, overcapitalising and providing an asset that a lot of people don’t want. 
  • If you’re going to be spending the money, what reward are you going to get back? You’ll get less rent from the house in the front, if you put a house in the back.
  • Be clear if you are renovating for lifestyle or renovating for investment.  

David Johnston- The Property Planner’s Golden nugget: if you’re doing a significant renovation to your home, extending out or up or knocking down walls, it’s well worth the investment of engaging an architect and getting some drawings done and talking through your vision. The architect will open your eyes to new ideas and get you thinking in different directions. And getting that vision clearly documented in advance will pay in the long run in terms of the end result.  

Cate Bakos – The Property Buyer’s Golden nugget: people who are considering a renovation but are keeping in mind their future ability to sell, crate a product that has mainstream appeal. If by extending out into the backyard compromises the future yard space, you need to think about spending more and going up instead.  

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