Home improvement is never as easy as it sounds. Out of every 100 investors, about 75 of them will increase value of a house by taking a distressed property and doing a plain cosmetic refurbishment.
I am one of them. Without a shadow of doubt.
However, I started to now think what if I want to increase value of a property which is not classed as distressed property?
We need more creative ways to add properties into our sourcing database than just searching for distressed properties on Rightmove and Zoopla websites.
It turns out that we can actually start adding properties into our portfolio by buying properties already in good shape and then adding further value.
You will need a basic framework to apply when you view a property and see what value can be added to the property so it falls into your numbers as a deal.
If you make the list given within this post a checklist, then you have a system.
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1. What Will You Learn?
- Home improvement or Value addition strategies
- List of Home Improvement Items that will add value to a property
- Cost of home improvement to house price increment matrix
- Cost of home improvement to returns on investment matrix
- Home improvement pitfalls to be aware off
2. Home Improvement Strategies To Add Value
Home Improvement strategies may sound as a polished heading but it effectively boils down to simply one thing
i.e. what do you want.
Why would you want to take up any improvement project and how much can you afford on value addition?
In other words:
The strategies should revolve around couple of factors:
Home Improvement Based On Purpose
If you are looking for a better resale price and/or better rentals than average rent in the street, then you are looking to take up certain type of value add items and avoid few, the cost of which will outweigh the returns.
- You choose to add value for better resale/rentals
- You add value for your own comfort living
It’s not about how much of improvement you have achieved in a house but how much of returns you ended up with and that should drive your home improvements.
Such returns can be tangible (monetary) or intangible (comforts).
Home Improvement Based On Funds Available
One thing that anyone should be mindful of trying to add value is, how much of funds are at our disposal and how can we effectively use them to increase value of a property.
- Choose value addition items that fits low to medium budget like just carpets, new bathroom, new basic kitchen or even just fixing doors and windows.
- Choose value addition items that are suitable for bigger budgets like an extension or a garage conversion or a conservatory.
- Choose home improvement just because its economical than moving to a bigger property.
There is no point going for high end refurbishment items when we don’t come with rich pockets.
Home Improvement Based On Expertise
Your home improvement choices also rely on complexity of work you are willing to undertake and how much of hassle you can go through.
- Are you all good to carry forward with cosmetic refurbishment like new carpets, new bathroom or kitchen?
- Do you have expertise to secure planning permission and extend the house at the back or add a room upstairs?
- Do you have expertise to divide the house into two separate flats altogether so you can get increased rents and resale value?
Last thing anyone would want to do is rely on someone’s expertise and think everything is going to sail through without issues. Due diligence is a must before engaging anyone on improvement projects.
3. List Of Home Improvements That Adds Value
Once you have identified your requirements or purpose of why you want to refurbish a property, you will need a list of items that you can target for value addition.
While there are many ways to increase value of a property, it would be great to have a classification of core list of value add items
i.e. The big hitters:
Those which add great value and increase house price versus the secondary ones that give decent returns.
Core List of Value Add Items (The Big Hitters)
1Loft Conversion: Value Add of 12% to 15%
Converting a loft is most common home improvement in practice which increases house price by at least 12% to 15%.
Please do consider the fact that you will have to ensure stair case is extended to reach to the loft and the returns are based on what you are able to convert it to. You could either add a bathroom or a bedroom as part of conversion or in some cases both depending on size of the loft.
2Painting & Redecorating: Value Add of 5% to 8%
The quickest way to increase value of a house is just paint and decorate the house to give that new home experience to the buyers.
Believe it or not:
Providing an experience sells any day.
The value increase with such minimal work will range between 5% to 8% as a rough guide.
3Conservatory: Value Add of 6% to 7%
Another low cost approach to increase value of a house or provide more space within the property is adding a conservatory.
Talk about adding more living space, then this is it.
Typically a house price will see an increment in the range of 7% to 10% with addition of a conservatory.
4Extension: Value Add of 15% to 20%
The most desired way to increase value of a house is to be able to add an extension either at the back of the house or on top of garage.
Extensions are also possible if one can get creative, changing the floor plans with help of architects.
Typically, this would cost a little higher than others, but can return between 15% to 20% in value addition depending on the type of extension.
5Garage To Living Space: Value Add of 12% to 15%
The important question is, how many of us really use garage to park our cars?
Very handful I believe.
Garage can be converted to either a living room or a bedroom with ensuite downstairs. The typical returns range between 12% to 15%.
6New Kitchen: Value Add of 5% to 8%
Who doesn’t like a new kitchen?
This probably is the most favourite of value addition that most of us, be it investors or home owners would love to take up.
The costs can be as low as £1500 to as high as £20,000 depending on house price. However this gives a good return of 5% to 10% depending on the spec of kitchen.
7Add a Second Bathroom: Value Add of 4% to 5%
Be it sales or lettings, an extra bathroom is a go to feature within a house that sets it apart from the houses nearby.
The returns with a new bathroom or an addition of second bath room can range from 4% to 8% in value addition.
8Back Garden: Value Add of 3% to 5%
One which most of us tend to ignore is that
A good garden can increase the house price by at least 5% to 8%.
This is a task that is least disrupting to the property and can even be done by self, if you are a person who doesn’t mind some physical work.
The Secondary List Of Value Add Items
Apart from the big hitters that fetch most returns or value addition, the following provides a list of secondary items to be considered to add further value to a property.
- Renovate Existing Bathroom
- Lay out brand new carpets
- Refurbish front garden to car park spaces
- Make front view of the house appealing
- New doors & windows
- Remodel existing space (drawings, add/remove walls, modern life styles needs, multi-functional spaces, public spaces in particular, more light in)
- Garage cleaning and storage solutions in garage
4. The Home Improvement Cost to House Price Increase Matrix
There is no way anyone should enter into any kind of home improvement until he/she has a good understanding of how much it costs and what the value added due to the works.
Putting it all together:
The big hitters that generate maximum value addition can be mapped as follows.
Note: Above ranges are defined based on averages from our previous investments, advice from real time property investors and online research. This also considers an average house price of £200K.
5. The Home Improvement Cost to Return on Investment Matrix
Further if your home improvement criteria is to have good return on investment later then here is a quick tabular view to map cost of improvement to return on investment.
Note: The average property price of £200K is considered for above costs. Return on investment is calculated based on profit secured due to value addition for each item divided by cost of value addition item.
Profit on Loft Conversion = (15% * 200,000) – 18,000 = 12,000.
ROI = (12,000/18,000) * 100 = 66.67%
6. The Pit Falls To Be Aware off
Drawing a Line
The first one is to exactly know where to draw a line. Often people get carried away with refurbishment thinking they are adding value to the property.
In other words:
Its about controlling ourselves and building a logical plan on what we wish to improve.
A £15000 bathroom or a kitchen refurb for a property which is worth £50,000 isn’t worth. Having said that a £3,000 kitchen for a £1 million house isn’t right fit either.
Improvements Without Permission
There are permitted developments defined by councils within UK to carry out improvements, however, as a rule of thumb its better to notify and get approval on all improvements planned.
Choosing Your Builder and Materials
Any improvement warrants at-least 3 quotes to ensure you are getting the best deal. People often pay excess on materials unless they are able to request builders to avail discounts on their traders card.
Another best way to avail massive discounts is via LNPG membership.
Finally while the numbers provided in this post are based on our investments and online research, it must be noted that there will be variations on prices and returns based on investment area, type of properties and their prices.
The value increment and ROI numbers provided are to be taken as a guideline and in no way represents a repeatable framework.
Happy home improvements!!
[Image Credits: Flicker]