| -- End Ad Box ---> | | | | as all the time required to supervise the renovations |
| In recent years, it seemed that you just | | | | and/or do some of the work. And they would have |
| couldn’t go wrong when improving your home. | | | | made more money by doing absolutely nothing! |
| No matter what renovations were undertaken, or | | | | You might be thinking, “Well, it doesn’t |
| how much was spent, the property ended up being | | | | matter really, because the property is still able to be |
| worth more than the original cost plus the cost of | | | | sold at a profit”, and to an extent you are right. |
| improvements. | | | | The problem occurs when the market stops growing, |
| In fact, many people have been making a living from | | | | and the market flattens out. |
| flipping houses — buying a property, doing a | | | | During 2005, thousands of property renovators on |
| quick make-over, and on-selling for a profit. | | | | the east coast of Australia were caught out in |
| On paper, just about every renovation has seemed | | | | exactly this way, when the property market in major |
| to be profitable. And yet the reality is that many | | | | cities went decidedly flat after a strong boom period |
| home improvements are a financial disaster without | | | | ended in 2004. Because the market had stopped |
| people realising it. How can this be? | | | | going up, many renovators who tried to sell their |
| The answer lies in the steadily improving market | | | | properties found that the market price of the |
| prices of most properties, particularly those in | | | | property was less than the original cost plus the |
| sought-after areas such as California USA and | | | | home improvement costs. |
| Queensland Australia. A rising market will tend to hide | | | | Those renovators who did not actually have to sell, |
| poor home improvement decisions. | | | | had the option to wait for future increases in the |
| Let’s take an example. Imagine a house | | | | overall market to lift the price of their property |
| bought in 2004 for $400,000. During 2005, $60,000 is | | | | enough to cover their costs. But those who had to |
| spent on improvements, and in early 2006 the | | | | sell after carrying out unwise home improvements |
| property is sold for $500,000. Leaving aside the | | | | found that they were facing losses, in some cases |
| transaction and holding costs for simplicity, | | | | very substantial losses. |
| that’s a profit of $40,000 on the renovations, | | | | The flow-on effect for the Australian market has |
| right? | | | | been that there are few property investors around |
| Maybe. Maybe not. You see, what you have to take | | | | now, and expenditure on home improvement |
| into account is what that property would be worth in | | | | products is sliding. |
| 2006 if no improvements had been done. | | | | The property market in the US is still quite buoyant, |
| Let’s say the general market growth had | | | | but there are many signs that the market’s |
| taken the value of that unimproved property to | | | | bull run is coming to an end. This is a time for home |
| $450,000 during the 2004-2006 period. This | | | | improvers to be cautious. |
| represents a profit of $50,000, $10,000 more than | | | | It is still possible to undertake profitable home |
| the profit achieved through the home improvements | | | | improvements, but renovators need to follow strict |
| being done. | | | | guidelines and be very disciplined in their approach. |
| By doing the improvements, the home owners | | | | Home improvements need to make financial sense |
| needed $60,000 to fund the renovation costs, as well | | | | whether the market is going up or not. |