Does Renovation Increase the Value of a Home?

Does renovation increase the value of your home beyond your renovation budget?

Some property owners have all the wrong ideas about increasing the value of their homes.

Many homeowners are happy to spend large budgets on renovating their homes thinking it will increase the value of their home beyond the money spent.

However, that is not always the case!

As you will discover in this article the value of the land component of a single-family home has increased to the point where the majority of a home’s value is in the land. The value of the construction is becoming negligible. Spending money on improving the building may not add much more value to the property resulting in a poor return on investment.

In many circumstances, it is simply not economically feasible to extensively renovate a house. Some home owners overspend and over capitalize into their homes resulting in a home valued at less than the total money spent on the home.

So let’s look at other options that yield a better return on investment.

Dramatic Escalation in Land Prices

Firstly, we need to understand the dramatic escalation in land prices in our cities for single family home residential building lots.

The cost of building a new single-family home has dramatically changed over the years.

The cost of building has become more expensive but the cost of land has far exceeded the rate of increase in the construction cost of a new home.

Let’s have a look at some real-world examples.

These three homes were built in the same suburb and each property is a single-story home only slightly larger than the last.

The first home was built in 1987. The land cost $27,000 for 700 square meters with a 20-meter frontage. The completed house with driveway and landscaping cost $110,000 to build. The total property cost was $137,000.

The land was about 20% of the cost of the whole property.

Back in the 1980s land was comparably cheap by today’s prices.

The second home was built in the 1990s, the land cost $52,000 for 670 square meters. Land had doubled in price for the same size lot. The complete home with driveway and landscaping cost $120,000 to build. The total property cost $172,000.

The land was 30% of the cost of the whole property.

The third home was built in the early 2000s, the land cost $98,000 for 600 square meters. Land had doubled in price again. The complete home with driveway and landscaping cost $145,000 to build. The property cost $243,000.

The land was 40% of the cost of the whole property.

Are you starting to see a pattern here?

Building a New Home

The cost of the land is escalating faster than the cost of building a new home. The land is increasingly becoming a larger component of the total property value. And the average size of a building block is getting smaller with a narrower frontage.

In 2022, land in the same suburb was around $500,000 for 450 to 600 square meters. There isn’t much land being developed in the suburb. Property developers are restricting supply by only releasing a few lots of land for sale to the market to keep prices high. The property developers have reduced the average lot size down to 450 square meters and the average frontage size down to 14 meters. This makes it more difficult to build a single-storey home as the land is too small. As a result, most new homes are two-storey, narrow lot designs.

Building a new single-storey home in the same suburb today would cost over $700,000 for 600 square meters of land. The complete home with driveway and landscaping would cost at least $280,000 to build. The total property cost would be $980,000.

The land would be over 70% of the cost of the whole property.

In other more expensive real estate developments the land component can easily be over 80% of the cost of the whole property.

The result of this escalation in land prices can mean only one thing. Less land will be developed for single family home style residential real estate. More and more new developments will be higher density accommodation such as, town homes and apartment buildings.

Land in cities has simply become too expensive to justify building small or medium sized single-family homes.

Renovation to Increase the Value of a Home

Does renovation increase the value of your home beyond your renovation budget?

Homeowners that have an old home that requires extensive renovation to bring it back to new need to think carefully about their return on investment.

Firstly, you need to determine the value of the property.

Secondly, you need to determine the value of the land component. What would the property be worth as a vacant lot ready for building a new home?

If the home is reasonably close to the city, you will find the land component will be at least 70% of the value of the property. More likely, it’s 80% of the value of the property.

Homeowners have to ask themselves, is it worth spending a large renovation budget on the 20% component of the property?

Are you really going to add value to the property beyond your renovation budget?

Many home homeowners have been caught out renovating an old home to find hidden problems that blow the renovation budget. Fixing hidden problems doesn’t add any resale value to the home.

Generally, many homeowners find that the increased value of the home after renovation is less than the cost of the renovation.

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Knock Down and Rebuild

Maybe you have an old home in a great location and you don’t want to move. One option is to knock it down and build a new home on the existing land. This is a good option if other homeowners in the area are doing the same.

However, if old homes are being demolished and replaced with apartments or commercial buildings it would not be desirable to build a new home. You may end up with a new home in between two apartment buildings. This would make your property difficult to sell and further development of your land impossible.

Usually, building a new home on existing land will be worth more than renovating an old home. The new home will be worth the value of the land plus the cost of the new house. Whereas renovating an old home will only be worth the market value of an old home renovated.

Building a new home has a lot of advantages over renovation.

There are no hidden problems that add thousands of dollars extra to the renovation budget.

Many renovated homes don’t have the modern construction, electrical, plumbing and design features of a new build. Many renovated homes are still outdated and just look like an old home painted up.

A new home builder has to provide a structural warranty for at least six years. However, many builders provide a 10-year or longer warranty. More importantly, the building is “up-to-code” meaning that it’s built to the latest building regulations and has to pass all the building inspections.

Also everything in the house is new. New kitchen, bathrooms, roof, walls, ceilings, floors, windows, doors, plumbing, electrical, paint and appliances.

Knock Down and Re-Subdivide

As the cost of residential land has dramatically increased in price, building a new home may not be economically and financially viable. And the high cost of renovations, which may not increase the value of an existing home, do not appear to be logical option.

There is one trend in the market that makes economic and financial sense.

Knock down several houses and re-subdivide the land into smaller lots.

Older homes that are now outdated and in need of substantial renovation were built on large lots. If you have an old home on land large enough to subdivide into two lots that’s an easy and profitable option.

If a developer can acquire two or more homes together on adjacent lots the homes can be demolished and the land re-subdivided into smaller lots for new homes. Depending on zoning regulations, the land may be suitable for high density apartment style construction.

However, land is now so expensive in the suburbs that homes only thirty years old are being demolished and the land re-subdivided.

Conclusion

Does renovation increase the value of your home beyond your renovation budget?

Not always.

The value of the land component of a residential single-family home has increased to the point where the majority of a property’s value is the land. So spending money on improving or renovating the building may yield a poor return on investment.

Alternatives to renovation that increase the value of your home.

Knocking down an existing home and rebuilding is a more economically viable option. Building a new home has a lot of advantages over renovation. New homes are built to the standard of the latest building regulations and everything is new. The new construction comes with a statutory builder’s structural warranty and certified building inspections.

Another option is the re-subdivision of existing house lots. This has become economically feasible in the suburbs of our cities. If you have an old home on land large enough to subdivide into two lots that’s an easy and profitable option. Otherwise, you would need to approach your neighbors and make a proposal for property re-development.

A final option is to approach your neighbors and make a proposal to sell your properties together to a property development company for the purpose of high-density residential construction, such as, apartments or townhouses. The developer would demolish the homes and amalgamate the land together into a larger development. Normally, a developer will pay a premium price for each home if they acquire all the properties together. Most neighbors would take an interest in an opportunity to sell their homes for a significantly higher than market price and without paying real estate agent fees.