Picture this: you buy a three bedroom home, and then you add a room...
Add a room and add value.
A fourth bedroom, and maybe an ensuite. Maybe the house is three or four bedrooms already, and you need to add a room in the form of an extra bathroom.
Most families today prefer a four to five bedroom property to live in, so that Mum and Dad have space, as do the kids (they might even need a play room). Then there's the office, study, or sewing room that you need to find room for as well. Home-based businesses are burgeoning and people still like to have real space for their hobbies.
Two bedroom houses are mostly considered too small for anyone but retirees who don't have grandchildren or people over to stay any more, and modern houses of three bedrooms or above are never built with less than two bathrooms, or at least one and an ensuite.
So finding a way to add a room to your investment property can really increase value! In rare instances, you might be allowed to do this to an apartment as well. Keep your options open.
How much value can I add to my property?
Well, based on average house prices in Sydney (with a median house price currently in the high $500K bracket), an extra bedroom can add between $100- $150 per week to the rental return on a property.
In houses under the $1M mark, working out how to add a room can put an extra $60,000 onto the value instantly. Add a room at the bottom end of the market (in areas like St Marys, where we started out), and you can improve a property's value by between $30,000-$50,000 because houses with four or more bedrooms are quite difficult to find in that area. Jump over a million dollars, and your investment in adding a room can add $300,000-$400,000 to the value of your property!
That's all very well, but what does it really cost?
Well, if you choose your target property judiciously, throwing up a stud wall to add a room under the existing roof can cost from only a few hundred dollars, to $3000. It's not expensive.
When you consider that your rental return should increase by at least an extra $5200 (at only $100 per week increase in rental) per year as a result, it pays for itself almost overnight, and can take a property that is negatively-geared up into positively-geared territory even faster!
Sometimes it's not always possible to add a room under the existing roof, or the need for an extra bathroom is more pressing. Although this can add an extra $30,000 to your costs (if doing a basic extension with a bedroom), or $20,000 if someone has to plumb and fit a new bathroom for you, this isn't too bad either.
If you're handy, you can cut bathroom costs considerably and install an ensuite for under $2000, as long as you have it inspected and approved by the appropriate authorities.
Remember that even at 10% interest, a $30,000 increase to your loan will only cost you an extra $3000 per year, so you have at least another $2200 extra rent, all to yourself. With home loans costing nearly half that - and less - you should be able to do considerably better than that!
As always it pays to do your sums though. Check the costs against actual sale prices and rental returns for your target style of property in your chosen area before you embark on such projects.
What types of rooms should I consider adding?
As mentioned before bedrooms, bathrooms and ensuites are the most desirable additions to homes. And extending up or out doesn't have to be the way to go.
As a rule of thumb, a bedroom should measure at least 3m x 3m, or it can only be considered a storage room or a study by valuers. If you can extract an extra 3m x 1m out of one end of it, then you have room for an ensuite bathroom as well, with a shower at one end, toilet at the other, and a sink opposite the door in the middle.
Some people look for houses with large L-shaped combined living and dining rooms. If the living space is big enough to include a dining area as well (or the kitchen/family room is big enough to handle a dining area) and the original dining area already has a window - or is easy to have one installed - then it's a simply matter of putting up a stud wall and doing some wiring for a new light and switch. Presto! You've added a room!
It can sometimes be tricky to find the right place to put a second bathroom, but if the laundry is at the opposite end of the house from the original bathroom, and it's big enough to split in half, then you might have a perfect opportunitiy.
We did this in our first property. In this case we both found space AND built out, because there was a back lean-to extension which was too small to be practical. We knocked the lot off the back and rebuilt the whole rear out to the length of the laundry, which was twice as long as the other two rooms. One side (which had been a small office or sunroom) became a fourth bedroom, the middle room became the dining room (a nice step down from the kitchen/family room once the wall was removed where the original back door had been, and the much larger laundry was split in two to create a second bathroom opposite what was now the master bedroom (the fourth bedroom was actually the biggest).
So if you thought that adding a room to your property wasn't a cost effective way to add value, then perhaps you should go and do your sums again! Hopefully now you can see that this is a brilliant way to improve your property's earning potential without breaking the bank.
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