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Analysing your renovation financially (not emotionally)
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By Chris Gray.
Chris is the managing director of Red Wealth Creations. He is an independent real estate advisor & author. He currently stars on Channel 9’s ‘My Home TV’. Chris wrote the following financial analysis on renovations. More information can be found in Chris Gray’s book, ‘Go for you Life’ or on his website www.goforyourlife.com.au
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Many amateur investors come up with a simple formula for deciding whether or not to undertake a renovation and it normally goes like this: |
| Renovation Cost | $5,000 | $10,000 | | | | | Increase in rent/wk | $15 | $30 | | | | | Weeks to recover costs | 333 = 6 years | 333 = 6 years | | | | | Decision | No - Too much time and hassle | No - Too much time and hassle |
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More professional investors realise that decisions are not always black or white: - Do you think that a new renovation, such as a kitchen will increase the value of the property?
- Do you think that if your property increases in value then the bank will lend you more money, especially considering the increased rent?
Then why not consider taking this opportunity to re-finance your mortgage to cover the cost? |
| Renovation Cost | $5,000 | $10,000 | | | | | Increase in rent/wk | $15 | $30 | | | | | Extra interest cost/wk ($5K x 7% / 52wks) | $7 | $14 | | | | | | Extra Cashflow / wk | +$8 | $16 | | | | | Weeks to recover costs | 0 | 0 | | | | | Decision | Yes! | Yes! |
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Re-mortgaging does increase your debt but if your property grows in value by more than the renovation cost, are you not ahead financially? By renegotiating your loan you may get an even cheaper deal, which actually pays for the whole project. Most renters complain about properties not being clean and up to date. Would your property be easier to rent after a brand new renovation? Please speak to your mortgage broker, read the book, or contact www.goforyourlife.com.au to fully understand this concept, as this is not meant to be investment advice. |
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