|
YOUNGER home owners call it a bonus.
The baby boomer generation call it a rescue.
Accountants call it an opportunity.
Astronomical growth in house prices over recent years, has armed home owners with tens of thousands, sometimes hundreds of thousands of dollars of unlocked equity in their homes.
It seems we have spent much of this newfound wealth on cars, holidays and home entertainment packages, according to research. Some used the money to build up a stock portfolio, while others have sat and watched their nest egg grow.
It could make sense to buy an investment property – but at such high prices, buyers would need a big enough deposit to cover the shortfall between the rent coming in, and the mortgage repayment going out.
On a $200,000 apartment for example where your deposit is $20,000, rental may be $200 per week (reflecting a 5.2 per cent return). Mortgage repayments from most banks however, are around $307 per week - and rising if you believe the Reserve Bank of Australia, which says an interest rate increase is inevitable before the year is out.
For baby boomers approaching retirement age in particular, the commitment of another mortgage seems too great to get involved in – especially if they’ve spent a lifetime paying off their existing one.
In another corner, a brigade of young home owners – many high income earning singles and couples – are riding the wave of a booming economy. Companies are paying out record end of financial year bonuses, and anybody with blue-chip stocks suddenly find themselves with up to tens of thousands of dollars in one-off payments.
The answer to maximizing this newfound wealth, according to many industry insiders, may lie in the walls around you.
Accountants say it can make financial sense to reinvest back into your home, particularly if you are in a suburb identified as set for great things this cycle.
Agents agree, saying the value of property goes up by more than the sum of its parts, when owners reinvest in extensions, kitchens, bathrooms, paint and flooring.
“Owners are getting far more selling savvy nowadays,” says Tony Downward of Biggin and Scott in Kensington. “With the advent of do-it-yourself television shows, sellers realize that a coat of paint, new bench tops, tiles and floorboards can add big rewards at the end.”
It seems there are plenty of home renovators trying to cash in on your home, even if you don’t. Late last year a terrace in Flemington, in Melbourne’s inner west, was snapped up before auction for around $390,000.
Agents say the new owner pulled the carpet, polished the boards, modernized the wet areas and gave the house a paint. It sold for more than $450,000 months later.
Capital gains tax would have eaten into that property’s margin – depending on the vendor’s income tax bracket. Agent fees and miscellaneous expenses too could have knocked off another $10,000 profit.
Unlike spending money on an investment property, the Australian Taxation Office doesn’t impose capital gains tax on an owner’s principal place of residence.
An extension has the potential to add the greatest value to your home – particularly if it creates a larger open plan living area, or increases the number of bedrooms.
In a suburb such as Hawthorn, the difference between a similar two bedroom and a three bedroom house could be as much as $100,000, says Seamus O’Brien, sales executive and auctioneer with Marshall White Armadale.
“Many young families rule out inspecting a property if it’s a two bedroom,’ says Mr O’Brien.
Extending can be highly costly however, especially if major upgrades to plumbing and wiring are on the cards. But agents are convinced, it’s money well spent.
Two almost identical homes in the same pocket of Ascot Vale sold earlier this year, says Mr Downward. One was a 3-bedroom of about 14 squares, and the other was a 4-bedroom of about 22 squares. “The smaller house sold for $635,000, and the larger one fetched $810,000.”
An extension of this type would see about 70 square metres of additional living space added. Going rates for extensions are widely quoted at around $2500 to $3500 per square metre, depending on the type of building you are extending, says Colin Pavier, national sales and marketing manager with The Extension Factory.
“The greatest mistake people make is assume it costs the same to extend a house, as it does to build that space new,” says Mr Pavier. “It can take a month just preparing a house for extension given the fact we have to facilitate new pipes and wiring before we even start.”
“Extensions of older homes in particular must keep in harmony with the existing foot print, and things such as elevated ceilings and high pitched roofing require more detail to be reproduced,” he says. “Extensions must do justice to their investment to add value.”
For most home owners however, renovation within the existing floor-plate is a far more realistic alternative.
“Generally, people are spending on kitchens, bathrooms, master bedrooms and main living areas,” says Michael Titcomb, general manager for Harvey Norman Design and Renovations in Oakleigh. “The bulk of their budget is being allocated to the kitchen.”
Kitchens start at about $18,000 and can range up to about $60,000 excluding major structural work, says Mr Titcomb. “Our average price is $32,000 with the appliances representing about $4,000.” Entry level kitchens will buy you a small to medium melamine kitchen with a basic appliance package including an oven, hotplate and rangehood, says Mr Titcomb.
A family size bathroom can cost around $30,000, and buys a semi-frameless shower screen and tiles to shower screen height. “The price would also include all trade work such as plumbing, water proofing, minor electrical work and tiling.” Said Mr Titcomb.
The price of bathrooms often surprises buyers, who don’t factor in the costs associated with things such as relocating major bathroom components.
“I think there is a general misconception in the community at large surrounding bathroom costs – the perceived value is generally a lot lower than the actual costs,” says Mr Titcomb. “I believe this is because people don’t factor in items such as benching floors for drainage, which involves removing the floor and lowering the floor joists.”
“Likewise with today’s modern large square edged tiles, walls often need to be re-straightened through rendering or re-sheeting (to have effect),” he adds.
Polishing up floorboards is usually a price-on-application item given the board’s condition and depends on the existing board’s condition. If you’re house is on a concrete slab but you still want the current look – floating floors of various qualities can be installed starting from $19 per square metre, and ranging to $470 per square metre.
Not everything you spend on your home will make it improve by that value and then some. Some buyers are guilty of over-capitalising. Swimming pools and spas are examples. These can cost upwards of $30,000 – but due to ongoing maintenance required, doesn’t always add that much value to the house. Agents say money could be better spent on a high quality outdoor entertainment area with integrated barbecue.
Regardless of how home owners invest into their homes, perhaps the biggest benefit is that they get to enjoy the investment here and now, says Mr Downward.
“Some people buy homes around the corner from their existing homes and pay upwards of a $200,000 premium,” said Mr Downward. He says buyers should look at their current home’s capacity for renovation – as an outlay of $70,000 to $80,000 might just deliver the property they’re looking for.”
Case Study 1: Fiona Tribe
“I had three choices: invest in shares, invest in another property, or renovate my existing one,” says Fiona, who owned an unrenovated Californian Bungalow in Melbourne’s inner western suburbs. “The decision was an easy one as it enabled me to invest and enjoy the investment.”
Renovations started in the bathroom and have slowly extended out. “The entire bathroom and laundry were ripped out,” said Fiona. “The works included re-wiring, plumbing, plastering, tiling and installing a new hot water system.”
In addition to these works, Fiona replaced the weatherboards, fencing and windows.
With the exception of contractors employed for electrical and plumbing works, most of the work was carried out by Fiona and her family. “While this stretched the timetable somewhat, the cost benefits were enormous.”
Fiona said she invested around $10,000 or about half what it would have cost if she had employed labour for all jobs. Agents say these renovations could have increased the property’s value by more than 10 per cent.
Further down the track for Fiona, are plans to renovate the kitchen, and extend out to the backyard. The extension would include another bedroom and an open plan living area.
Expert Opinion: Ben Kane
“Investing in the main residence is the best form of tax free income, if you plan to sell” says Ben Kane, senior accountant with Spagnolo Accountants in Ascot Vale. “Taxpayers are able to claim a ‘main residence’ exemption if they sell their family home and therefore any capital gain tax is disregarded.”
But it’s a different kettle of fish if you invest in your property and decide to keep it. Ben says it’s important to repay money you have borrowed quickly – as you won’t have incoming rental to help with repayments – or be able to claim depreciation on your capital works.
“Current structures of home loans allow you to repay more than your minimum mortgage repayment, with no penalties,” says Ben.
Ben says that while the younger generation are buying smaller properties on smaller blocks of land in the inner city, older and larger land owners are sub-dividing their large blocks to sell, or develop a second residence.
“As soon as you subdivide you are creating a new capital asset which the tax office will look at as a taxable investment,” warns Ben.
Some costs can be recouped through the ‘capital works’ regime and non-cash tax deductions can be claimed over numerous years, he adds, but if the tax office regards this behaviour as a business – you could be exposed to a range of other taxes if and when you sell the asset.
“The tax consequences of how you treat building an investment property on your own land can vary,” says Ben who adds it’s always a good idea to seek professional taxation advice before calling in the tractors!
“It’s a sound choice to utilize as much land as possible of your home,” says Ben. “But in modifying houses, there is a risk that a potential buyer may view your property differently.”
Ben also advises that subdividing land is not something everyone can consider, as some councils are wary of building up areas without sufficient infrastructure to cope with new development.
Tags:
Related Items :
|
