Financing you renovations

When it comes to your next property renovation - have you got your finances sorted? 

In a Real Estate Talk  show, finance expert Andrew Mirams details some strategies you can employ to secure funding for your next renovation.

Here's the transcript of this interview:

Kevin:  Does financing a renovation to be any different?

Andrew:  It does.

There are probably the two main things we need to talk about. 

The first instance is whether the renovation is actually structural or non-structural.

If you talk about a structural renovation, that’s more an extension, extra rooms, maybe even a second story, or a significant amendment or change in the footprint of the property.

The way you would finance those might be different to what we would call then a non-structural or cosmetic renovation.

That might be just simply replacing a kitchen, bathroom, or both, or painting or floor coverings, etc.

The difference with the two of those is with a structural renovation, you will nearly always have them as a builder’s contract, unless you’re doing an owner-builder.

Certainly, you’ll have a build contract, and there will be certain stages of the development – as the renovations and improvements are added – that certain payments will need to be made.

Kevin:  Does the bank prefer you to have a fixed contract?

Andrew:  Absolutely. 

Owner-builders all want to do it themselves and save a buck along the way.

Sadly, a great majority of owner-builder projects actually never get finished, and you only have to look at a street with actually a builder’s own property, normally, and you still see it not finished.

A lot of them don’t get finished, and most of the banks don’t like or don’t do owner-builders, so they can be tricky in themselves.

The banks will always prefer a building contract of some sort to be provided.

Kevin:  Should you talk to the bank before that so that you can structure the contract around the financing needs?

Andrew:  It’s like most things.

In the case of a major structural renovation and improvement, you’re probably spending $100,000 to $300,000 or $400,000, depending how much, so obviously it would make sense to get a pre-approval to make sure you’ve got the funding at that level.

Once you finalize the plans, the contract, the tenders, and the quotes, etc., then you can go back with the actual terms and get the bank to finance them.

With a significant structural improvement, most of those would get financed along the journey.

Where you probably don’t finance them as much might be in a non-structural event, where you’re actually doing a cosmetic or interior renovation and not changing any of the footprint of the property. 

Kevin:  If I’m going to be doing a renovation, what are the things that I have to be wary of that are going to make the bank a bit nervous of funding for me?

Andrew:  If we talk about the structural ones, the main thing they want to know – and the key to all of this – is getting an end valuation.

If your property today is worth $400,000 and you’re spending $100,000 on a renovation or structural improvement, getting a valuer to come in and agree that it’s going to be worth $500,000 – i.e., your cost base – as a minimum to be able to finance that.

The end valuation is really important.

If you are over-capitalizing, you might be spending $100,000, you think your place is worth $500,000, and it only comes valued in at $450,000.

That can have a major impact on how you may finance it or not be able to actually complete the project.

Kevin:  To get a good feel for the end value, do you think it’s good enough just to get some agents in, or should we go the extra step and get a valuer in?

Andrew:  Normally, when we’re coordinating on behalf of our clients, we will actually coordinate the valuation on their behalf and try and arrange it.

That’s using our expertise and knowing the documents that we need to show a valuer – being the plans, permits – and what work we’re actually going to do.

If it’s on contract, we don’t have too many issues.

A lot of the variances probably come in what people think their actual property is worth today, and then, because you’re spending $100,000, they think that all of a sudden that’s going to add $200,000 of value, which is unrealistic.

Probably just managing expectations is the key in that.

Kevin:  Just your closing tip then, Andrew, your biggest tip on helping us get some funding for our renovation.

Andrew:  I was just going to make one other note just in relation to non-structural cosmetic renovations, which probably, depending on your property, can be as low as $10,000, or maybe up to $60,000 or $70,000 if you’re doing a kitchen, bathroom, painting, and floor coverings.

This is a tip to get a valuation uplift in the future.

If you can finance that yourself, valuers will generally take today’s value, plus your cost base of what it costs to do, and they’ll value it at your cost.

If it’s, like I said before, $400,000, and you’re doing $100,000, they’ll value it at $500,000, as long as they have realistic estimates or comparable sales of the property.

If you can do it and fund it yourself, what we like to do with our clients who have a good equity position and can fund it themselves is we like to get them the valuation in nine to twelve months – and we’ll generally get a nice uplift in the value, probably more to do with the market flow.

You’re based on three really key events, and that is hopefully and in the markets at the moment, you get a bit of market movement – an increase.

Obviously if you’ve done an improvement, you’re going to get a higher rent, which gives you a higher yield.

The key – and why we wait that nine to twelve months – is we are going to get comparable sales of renovated units that will justify a higher valuation.

That is the real key to getting that, and you’re going to release potentially more equity than what you’ve actually put into it at the outset.

Kevin:  As usual, Andrew, thanks so much for your time.

Andrew:  My pleasure, Kevin.

Listen to the full show at RealEstateTalk.com.au and while you’re there subscribe and receive our weekly podcast (or the transcripts) where I interview Australia’s leading property experts. 

About Kevin Turner Kevin brings together leading authorities on the property market in his weekly Real Estate Talk Podcast. Visit www.RealEstateTalk.com.au