Renovations for Return on Investment
Renovations for Return on Investment
One of the biggest questions almost all property owners face over the years is when it comes to decisions about what are the best renovations for return on investment and how personal taste can affect them. Whether you’re thinking about tearing down interior walls, redoing interiors, replacing a kitchen or bathroom, changing the exterior of your home/property, or redoing landscaping – renovations benefit from careful planning and research, including consideration of the costs and benefits of your project. Before you renovate it is wise to consider:
- Why you think you should renovate,
- What you need to know before you renovate, and
- Whether the type of property – a single family dwelling or multifamily unit – will impact your decisions regarding renovations.
Considering these factors will help you decide how best to proceed and what types of renovation make the best sense for your particular situation.
1. Why renovate?
- Personal Dwelling
- Rental Property – to increase rental income
- Preparation for resale
Renovating your home – your personal dwelling, is a very personal decision. Whether you plan to sell your home in the near future or whether you’re renovating to satisfy your personal requirements, your tastes will play a significant role in what components are involved in your renovation and the resulting finished product.
Experts suggest that you’ll achieve greater benefit from renovating in a more neutral way so that there’s greater potential resale value in your renovations versus renovating with the latest trends in mind, your personal favourite colours, finishes or materials, or unique requirements for your family. While it may be tempting to go in for the latest thing – don’t be too avant garde and trendy. Trends tend to wane and what’s popular this year may well be gone the next: just think about trends from the past such as avocado green or almond appliances, or pink, black and blue bathroom fixtures. The point is, when selling the home you want to appeal to the greatest number of likely buyers.
Keeping trends in perspective and making choices that are consistent with classic looks and design will help your home stay fresh and desirable – whether you’re staying in it for the long term or thinking of selling in the short or medium term.
In addition to being erroneously caught up in the latest and greatest trends, it’s also all too easy to over-renovate when it comes to your personal dwelling: for example putting a state of the art chef’s kitchen in a small one bedroom basic-style apartment in a building and neighbourhood where that upgrade would not necessarily add value. This is why it is important to take the time to think about what is your desired outcome from the renovation, what are the priorities for you and your family, what can you afford and what return on investment can you reasonably expect – in either dollar terms or in esoteric terms like having a welcoming, comfortable, workable home.
As a real estate investor you are always looking for a return on your investment. Making renovations to your property is a business decision versus a decision based upon personal taste. Typically, you renovate your rental property so that you’ll be able to achieve a higher rental rate, to maintain or improve the value of your property, or a combination of increased income and value, and thereby increase your investment profit.
An important consideration for rental properties is whether or not it is tenanted when you’re ready to renovate. Depending on where your property is located there may be restrictions on whether you can terminate a rental agreement for renovation purposes, or whether you have to offer the newly-renovated property back to your current tenant at the current rental rate versus the higher rental rate you hope to realize (e.g. Ontario).
It’s also useful to consider the level of your renovation and your ability to realize a higher rental rate. As a business decision, the level and cost of the renovations to your rental property has to balance with the achievable rental rate for your property. While every situation is unique, it is highly recommended that you think about how long it will take you to recover the cost of your renovations via the increased rental rate you can now achieve for your rental property.
Once again, be careful not to over-renovate – your rental rate is not just dependent on whether or not you have a newly renovated property, it’s also dependent on the rental rate the individual property, neighbourhood or location will support. Lastly, consider the ability of your “target renter” to pay the higher rental rate you wish to charge. As noted above, the cost of your renovation has to balance with the return on investment you can expect to realize.
Preparation for resale:
Whether you’re renovating your own home or your rental property for resale, these tips hold true:
- Don’t over-renovate
- Know your comparable neighbourhood/market values
- Classic and open is the way to go!
Resale is the point in time when you want to show your home or rental property to its best advantage in order to achieve the best selling price and a quick straightforward sale. This means it’s usually the time to do the most comprehensive and highest level of renovations that you can afford and that makes sense for the property and neighbourhood/building. Typically, you’ll be selling to a homeowner versus another real estate investor, so be sure to keep this mind when considering and planning your renovations. Don’t forget that home owners tend to make their decision based upon their emotions rather than simply looking at the numbers – so make sure your home or rental property has the best possible appeal to potential buyers.
2. What do you need to know before you renovate?
It all comes down to dollars and common sense – crunch your numbers, create a budget and determine what you can afford to spend on your renovation. Regardless of whether you’re renovating your personal dwelling or your rental property, it’s always a wise step to determine what renovations will give you the highest rate of return based on the reasons why you’re renovating as noted in the section above. It is also vital to consider what needs to be renovated or upgraded versus what you want to renovate and or simply repair.
Educate yourself – the Canadian Housing and Mortgage Corporation (CMHC) has several web-based resources to help you understand what’s involved in a renovation, how to plan your renovation, to help you choose a contractor, how to manage a renovation project and much more.
Here are a few helpful documents on renovations from CMHC:
This is particularly important if you’re not experienced in managing a renovation project. It’s tempting to think that it’s easy to manage a renovation yourself – after all the DIY television shows make it look easy and straightforward. But think about the other “fix it” shows on the DIY networks that address how to fix the mistakes made by inexperienced renovators. In short, it can be a rather expensive learning exercise when renovating a property without the experience or proper knowledge. In fact it can negate all the desired profit you were expecting to make.
When you’re creating your budget remember to include a generous financial contingency, I recommend at least 20 per cent, because no matter how well you plan and manage the project, the unexpected will happen and it’s important to be able to have the financial capacity to respond and deal with the unexpected. Also, my personal experience was that my renovation took about 15 per cent longer than expected, so I recommend including a time contingency as well.
3a. House/Single Family Dwelling renovations
A renovation offers endless possibilities to change or improve your home or single family dwelling (SFD) rental property. As discussed above, take your time and plan out your renovation – whether you’re managing the project yourself or working with a reputable, experienced contractor, as this will help you with your time lines and budgets. Think about the things that your family or renters need from the house. Look for unused or under-used spaces in your SFD such as attics and basements that offer the opportunity to be re-invented through renovation. As always keep renovations classic, neutral and practical versus going for wow factors or the latest trends.
As most of us do renovations in order to improve our property’s value, functionality and marketability, and because we usually don’t have an endless budget, as mentioned several times, it’s valuable to consider which renovations provide the best return on investment. This means achieving the highest potential return for the available funds. According to Canadian Real Estate Magazine, a recent BMO (Bank of Montreal) Home Renovation Report says 51 percent of Canadian homeowners plan to renovate their homes in the next year, compared with 62 per cent in 2011 and provides this Renovation Hit list:
Painting: When done well and with taste, applying a fresh coat of paint to the interior or exterior of a home is a simple way to realize gains on your renovation investment.
Return: As much as 300%.
Kitchen remodeling: A kitchen renovation can be one of the most costly home improvement projects. However, careful planning, budgeting and shopping will help minimize expenses. Consider aspects such as whether or not the project is in line with the style and quality of the rest of the house and neighbourhood.
Bathroom addition/remodeling: A bathroom addition should be a top priority for those looking to add value to a home with only one bathroom. This is particularly true if neighbouring homes feature multiple bathrooms. Additionally, upgrading an outdated bathroom will also bring significant value to a home.
Return: 80-130%; 65-120% respectively.
Window/exterior door replacement: Replacing inefficient windows or exterior doors can be an excellent use of your home improvement dollars, as they refresh the esthetic and also help to keep energy costs down. Stick to standard styles; odd shapes and highly customized arrangements do little for resale value.
Return: 50-90 per cent.
Deck addition/improvement/expansion: Decks are one of the few exterior improvements with any significant return, apart from painting.
Return: 65-90 per cent.
There are numerous resources (online, in home improvement stores, and in libraries) to help you determine the typical return on investment (ROI) for most home renovations, so do your research and consider whether each part of your renovation is necessary and whether it will offer a reasonable ROI. Another point to consider before you start any renovations is to be sure you’re aware of what municipal/building permits are required for both interior, and exterior and landscape changes. For example, in the City of Vancouver for landscaping, a permit is required in order to cut down any tree over 10 cm in diameter. Check with the municipality or civic authority for the area in which your home or property is located.
3b. Condo/Multifamily Dwelling renovations
Condominiums and other Multifamily Dwellings (MFD) have the same considerations as a SFD with respect to municipal or civic permits, but they also can require additional permissions and can include additional challenges.
Know your MFD’s bylaws and rules. Whether your home or property is part of a strata corporation, Condominium Corporation, or Home Owners Association (HOA), before you start any renovations, review the bylaws and ensure that you submit all the required information to obtain written permission from the strata council, condo board, or HOA board. Be aware that this may include detailed plans of the renovation, providing specifics regarding finishes (especially floorings), and particularly if any infrastructure is impacted such as electrical, plumbing and HVAC systems. Many MFDs have restrictions regarding the replacement of floorings or changing out carpeted surfaces for hard flooring such as hardwood, laminate, tile, etc. Renovations that impact infrastructure may require architectural or engineering reports and plans before any permission can be obtained. Lastly, your renovations are typically limited to the interior of your unit and can’t alter adjacent common areas or exteriors unless expressed written permission is granted in advance. This might require more than just consent from the strata council, condominium or HOA board, and may require a more formal and protracted process including a special general meeting or consent from the majority of owners.
MFDs will also have specific bylaws or rules regarding hours of work, access to the building and the suite for trades and workers, requirements regarding demolition disposal and other items such as common area clean-up. As an owner you’re responsible for ensuring that anyone working on your renovation project has the proper credentials, insurance, and are made aware of all the rules and requirements. Lastly, regardless of receiving formal permission, speaking directly with your neighbours to ensure they are aware of the renovation and know who to call if they have any concerns and issues will go a long way to ensure a smooth renovations and maintain good relationships with your neighbours.
The bottom line is – be sure to do your homework regarding the bylaws, rules and requirements of your MFD before you even start planning your renovation. This will help you avoid disappointment and costly missteps, achieve your renovation and remain a good neighbour.
To make my point about getting written permission prior to taking on the alteration, here is a link to a recent article regarding a playground being erected in a housing community that is part of a HOA: HOA threatens jail time for family over color of backyard play set.
In conclusion, please bear these things in mind and enjoy your renovation:
- Don’t make things too personal in your renovation.
- Don’t over-renovate for desired outcome.
- Repairs may a have better rate of return then renovations – so do your homework and work through the costs and benefits.
Note: In light of a recent Conservative campaign promise to reintroduce a renovation tax credit for Canadian property owners it may be tempting to start renovating. If enacted, taxpayers would be able to claim up to 15 per cent of the cost for permanent renovation to their permanent/principal homes, condos and cottages, and the tax credit would apply to renovations that cost anywhere between $1,000 and $5,000, allowing investors to collect up to $750 a year. But it’s too soon to count on this tax credit as it’s not yet enacted. So far this does not extend to rental properties.
Sidebar: When disaster strikes – flood, fire, smoke – it’s important to understand your options and whether you may have the opportunity to renovate vs. repair. An insurance settlement typically covers the cost of the repairs needed to return the property to the pre-disaster level. This could mean the original condition of the property or to the level of previous upgrades if your insurance policy includes these upgrades. There may be an opportunity for you to pay a bit more and do some renovations to upgrade your property. This is a topic for another day – stay tuned for more in a future issue.
Sidebar: Repairs versus Renovations – before you tackle renovations, take a thorough look at your home or rental property and address any outstanding repairs. For example, you can have a fully renovated interior but if the exterior of your property is in shoddy shape you won’t realize the full benefit of your renovation. If you have a leaky foundation – fix it before you put in a brand new finished basement suite, otherwise you may well have to tear out your renovations in order to fix the underlying problems at a later date. Similarly fix fences, smarten up the landscaping, repairs cracked walls or tiles inside and out, ensure all painted surfaces are smooth and clean, and then take your time and plan your renovation.
Sidebar: Even modest renovations can make a difference – if you can’t afford to replace an entire kitchen, consider a slight upgrade such as painting and replacing surfaces like cabinets, counters or back-splashes. Even painting cabinet doors and changing cabinet hardware can make a difference. If you have stippled or popcorn ceilings, removing the texture and the newly smooth ceilings will help open up and freshen any space. While it’s exciting to go for the wow of a big renovation, more modest renovations will have a solid ROI, be more affordable and still make your home or property more comfortable and appealing.