One family home €” four ideas
The Age
Saturday October 17, 2009
Insiders tell Kate Robertson how to make money from a suburban house. USING an unrenovated, three-bedroom weatherboard house in Pascoe Vale South as an example, we asked four property experts how they would tackle the challenge of increasing its value from its present estimate of about $625,000. Their responses were as varied as the risks and potential returns.*The architectThe director of Archameleon, architect Justin Moore, took up the challenge with gusto. Rather than home in on the original 1959 kitchen and bathroom, Moore concentrated on getting "more bang for your buck".The double-front property on a corner block has three bedrooms off a central hall, with a front living room off to the right and, at the back, a north-facing kitchen, laundry and bathroom. Moore's vision involved revamping the floor plan to turn the south-facing living room into the main bedroom, with an en suite and walk-in wardrobe, and adding a living area at the back. The dated but functional kitchen and bathroom were untouched."If you are going to spend $15,000-plus to renovate the old bathroom, it's just as easy to build a new one," he says. "It costs the same to build a new one as it does to fix up the old one €” probably less, because you have to rip the old one out."It's fairly cheap to turn the living room into a bedroom and there's an opportunity to put in an en suite, so it's at the cheaper end of bathrooms and there's no demolition costs."And rather than spend big money on a new kitchen, Moore would invest in building an additional living area out the back."Someone could add the room on and still live in the house so they have saved rent. It's a fairly simple addition so there's no problem with plumbing," he says."You still haven't pulled your house down and overextended yourself and ended up in a predicament if the market turns. And you have a three-bedroom home, plus study and en suite, and a living room that is in a better position on the northern side. If you decide not to sell, you have made it more liveable."–The numbers: the renovation would cost about $90,000 and, according to the real estate agent, would add a maximum of $85,000 to the value of the property.–Bottom line: about $5000 out of pocket.The real estate agent"Sell as is. Don't renovate," says the director of Ray White real estate in Pascoe Vale South, Michael Chan. From a financial point of view, renovations do not make sense, he says."We have to bring people back down to earth who think they can get heaps more because of their renovation," he says."With Bunnings and reality TV shows, buyers don't put as much of a premium on renovation; everyone thinks they can put in a pergola."You tend to find people have their own ideas about kitchens and bathrooms and they prefer to work with a blank canvas."Mr Chan notes that many buyers say they don't want to pay for someone else's taste.He says unrenovated properties sell really well because they attract a broad range of potential buyers: those looking to renovate, those looking to knock it down to build their dream home and those who want to get into the market now and perhaps renovate later.–The numbers: doing nothing costs nothing and is stress-free. Mr Chan estimates the property could sell as is for between $600,000 and $660,000.–Bottom line: status quo.The developerA director of the Better Living Group, Daniel Mazzei likes a weatherboard house €” it's cheaper to demolish.He has no hesitation about the best way to maximise the value of the property. He'd pull it down and put up two 21-square, two-storey townhouses with double garages and quality fittings."Unit developments in this area are always the best option," Mr Mazzei says."Units are the only way to maximise your value. To build single-storeys would be cheaper, at about $155,000 each, but the return would not be so good."As a developer, he'd pay $550,000 to $600,000 for the site, factoring in its valued corner position and north-facing orientation. "For a corner block, you might get $40,000 to $50,000 more than the same block next door. You can fit more on a corner block because you don't need a common driveway and, from a marketing point of view, you can have your own frontage."To build the units, as the owner of the property, you would become the developer, contracting a builder to complete the project. From drawing up plans to settling on the units, you could be looking at two years.Mr Mazzei says there are several development options for the site, including keeping the house and subdividing."If the house is in good condition and just needs a $50,000 renovation, you would keep it but two new units sit much better than one new and one old."Townhouses would cost between $270,000 and $300,000 to build, with Mr Mazzei expecting a 30 per cent gross return.A low-risk option would be to organise approval for planning permits for a townhouse development, he says.While it would cost about $20,000 to get the approvals, builders would be prepared to pay an extra $60,000 to $70,000 more for a property knowing they can begin developing it immediately and avoid holding costs of about $40,000 a year on a $600,000 property while going through the approval process.Once you have the permits, you can evaluate the market to decide if you want to go ahead and build or sell the property with the permits in place, Mr Mazzei says.If you decide to build, you could also sell the townhouses "off the plan" to buyers, who appreciate the opportunity to have some input into the finishes used in the home and the stamp-duty discounts for buying before completion.–The numbers: to build two three-bedroom, two-storey townhouses would cost a minimum of $540,000. The real estate agent expects they would sell for about $575,000 each, while the developer estimates they would go for upwards of $700,000 each.–Bottom line: a loss of $15,000 according to the real estate agent. A gain of $235,000 plus, according to the developer.–The numbers: to go through the approval process and obtain plans and permits for townhouses would cost about $20,000 but the property could sell as is for up to $660,000, according to the real estate agent.–Bottom line: could add about $35,000.–The numbers: if you subdivided the block, you could sell 220 square metres of the backyard for about $260,000 and the original house for about $450,000, according to the real estate agent.–Bottom line: could add $85,000 in value.The tax expertA partner of Pitcher Partners, Michael Hay, says people should be very careful about how they dispose of the family home because of its unique tax status.The sale of your home is exempt from capital gains tax, which would be applied to half the actual gains on other properties held for more than 12 months. The gain would be added to your income and taxed at your marginal rate, potentially claiming as much as 23.25 per cent of sale profits.The exemption applies only to your principal residence, so any profits made from building and selling townhouses on your property would be subject to capital gains tax or income tax."If you sell the backyard as a vacant block, there's no CGT exemption unless you sell the whole lot," Mr Hay says."Think carefully before you do anything that puts you outside the CGT-exempt environment of the family home. The most important thing is to do your costings before deciding."*Disclaimer: Figures cited are estimates only and do not take into account an individual's financial status, tax implications or the property transaction costs.
© 2009 The Age
