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Should you keep, renovate or sell your home?

Deciding whether to renovate your home, to turn it into an investment property or sell it, comes down to weighing up your personal and financial circumstances, as well looking at the property market and potential costs. Let’s look at some pros and cons as well as things to consider.

Renovating your current home

Renovating can be a key step in the process of selling, staying or turning your current house into an investment property. It could be just what your home needs to make it more appealing as a place to live – whether that’s for you, for renters or for buyers.

 

But to make sure you don’t over-capitalise (spend more on the renovations that what you’ll get back in resale value), or blow out your renovation budget, first you need to know why you’re renovating:

 

 

Are you renovating to sell?

When you’re renovating to sell, your goal is to increase the value of your home so that you can sell your property for a greater profit. Some of the savviest renovations for return on investment include: a new kitchen, a second bathroom or adding a bedroom.

 

Are you renovating to rent out?

When you’re renovating to rent, your goal is to boost rental income – smaller renovations can be a good way of commanding a higher rental income. You may want to get a local real estate agent’s view on how you can give your property greater rental appeal – but a fresh coat of paint inside or out, or a new carpet, could help.

 

Are your renovating to make your home more liveable?

When you’re renovating to stay, you’re wanting to make your home more liveable – updating your current home in a way that will make it easier or more enjoyable to live in could be the answer. For example, upgrading the hot water system or bathroom, or building a deck for outdoor living.

 

 

Pros and cons of renovating versus selling

Potential benefits of renovating

  • Avoid the costs of selling. The costs of selling your home and buying another can quickly add up, including stamp duty (a tax on property purchases), real estate agent sales commissions, moving costs and more. In comparison, even adding an extra bedroom or bathroom could be a fraction of that cost.
     
  • Improve the comfort and functionality of your home. A renovation could solve the problems you have with your current home, whether it’s the need for extra space or more modern amenities.
     
  • Increase the value of your home. Renovations can increase the value of your home, whether you’re looking to sell straight away, or down the track. They can also increase the rental value if you plan to keep the property as an investment.
     
  • Lower energy costs. Things like upgrading to more efficient appliances, installing solar panels or better insulation could lower your living costs over time.

 

Potential disadvantages of renovating

  • Overcapitalising. One of the biggest risks when renovating is overcapitalisation – when you spend more on the renovation than the eventual increase in property value. When you’ve overcapitalised, the sale price of your home doesn’t reflect the amount of money you spend on renovations.
     
  • Blowing the budget. Whether it’s because of time delays or hidden costs, renovation costs can creep up fast.
     
  • The time it takes. Most renovations take longer than planned - waiting periods for materials or new appliances, coordinating tradespeople, or even bad weather can slow your renovation. Keep in mind that time delays can affect costs as well, particularly if you’ve had to move out and rent elsewhere while your renovations are happening.

 

Potential benefits of selling
 

  • Take advantage of your equity. Utilise the equity that you have in your property – including any capital growth – to upgrade to a better or more suitable home. 
     
  • Accommodate your needs. Sometimes, a renovation isn’t possible to achieve the current or future needs you have in a home. When you buy, you can look for a property that will meet those needs.
     
  • Avoid the mess and stress of renovating. Having your home in disarray can make things stressful, especially when renovations run over time or budget.

 

Potential disadvantages of selling
 

  • It’s stressful. Some people consider moving home one of the most stressful experiences you can go through in your life.
     
  • It’s expensive. The costs of selling and buying property can run into the tens of thousands of dollars, including, possibly: 

    • Conveyancing ($1,000 to $2,000)
    • Marketing your current property (might range from 0.5% to 2% of the property’s value)
    • Agent fees (2-3% of the sale price)     
    • Property styling or staging (up to $5000)
    • Stamp duty (could be between 3-4% of the property value of the purchase price)
    • Lenders Mortgage Insurance (a percentage of your home loan, usually required if you have less than 20% deposit).
       

Learn more about the costs of selling a house.

 

 

Setting your renovations up for success

These simple strategies could give you a greater chance of making renovations work and meeting your needs:
 

  • Set a budget. Having even a ball-park estimate will help you stay on track – and having contingency funds handy for cost and time over-runs is a great idea.

  • Speak to your lender. If you think you need additional funds for your renovations, reach out to your lender to explore your options. You may be able to use your existing equity to cover the cost.

  • Avoid overcapitalising. Ensure you talk to local real estate agents and valuers to understand the current market conditions and get a rough idea of the likely value the renovation will add to your property.

  • Consider doing it yourself. Consider doing minor renovations – such as painting – yourself to save costs. But don’t over-estimate your abilities, or it could cost you in the long run.

  • Plan and design. Talk to tradespeople to understand the feasibility and costs of your idea. Get quotes as well as delivery timelines.

  • Start the council approval process early. Depending on your property type and the renovations you’re planning, you may need council approval. The earlier you talk to your council the better, as some approvals can take a while.

  • Look for low cost improvements. Such as new light fittings or fixtures, a fresh coat paint or some outdoor planting to add to street and visual appeal.

 

 

A look at overcapitalisation when renovating

There are a couple of ways you can over-capitalise when renovating. Always keep in mind whether the renovations are something that a buyer or renter would find appealing or pay more for, as well as the value of your home in comparison to the median price in your suburb.

Common ways overcapitalisation happens:
 

  • Doing a renovation that doesn’t add value in the eyes of the buyer market. For example, it isn’t cost-effective to add in expensive fixtures, features or finishes that look amazing, but don’t actually boost the value of your home.

  • When the location of your home affects sale price. Renovations that could push the value of your home a lot higher than the average of the area it’s located could extend your property’s value beyond what buyers would pay to live in your suburb.

  • The value of the renovation is affected by the wider property. For example, you add a high-end kitchen into an entry-level unit, but wouldn’t be able to make the same increase in sale price because the market doesn’t perceive the property as having the corresponding increase in value.

  • Your improvement is absorbed by capital gains. This can happen particularly when you are keeping the property for the long term. It means that when you go to sell the property, you get the same amount as you would have without the renovation, because the house appreciated in value.

  • You make unnecessary renovations. Such as when your home already has two bathrooms, and you add a third one.
     

Spending more on the renovation than the value added

Here’s an example: let’s say you own an $800,000 house in a suburb where the majority of houses sell for between $650,000 and $700,000.

You decide to upgrade the kitchen, bathroom, and move some walls to create an additional living room.

Ultimately you spend $100,000 on the renovation, but the value of the property has only increased by $50,000, because an additional living room generally doesn’t improve value.

You also risk your home becoming too expensive (say if you asked for $900,000 sale price for the home) for the area. Buyers may struggle to see the value in your asking price, to live in that area. 

 

Renovating to add value for a buyer

Another example: You own an $800,000 house, in a suburb where the houses tend to sell for between $800,000 to $900,000.

You buy ‘flat packs’ to upgrade the kitchen and bathroom, and do some of the work yourself. You purchase a ready-made pod to extend your house, adding a third bedroom.

Ultimately you spend $65,000 on your renovation. To get your money back your house would need to sell for at least $865,000, which is in line with average sales prices in your suburb – and an additional bedroom is seen as valuable to buyers.

 

 

Selling your property

When it’s time to sell, there’s lots to consider: calculating what your property could sell for, as well as associated costs such as marketing expenses and real estate agent commission. Read more about the costs of selling a house.

Some benefits of selling your property

  • It frees up funds for the purchase of your next home.

  • Not having multiple properties gives greater clarity over the amount of money you have available to purchase your next home.

  • Managing only one property is easier and less stressful – no need to worry about finding tenants and covering investment property cots.
     

Explore whether you should sell before you buy your next home.

 

 

Keeping your home as an investment

There are a few reasons you may decide to keep your current home as an investment property and rent it out.

 

  • Rental returns. An investment property generates regular monthly rental income. If the rental income is more than you need to pay to maintain the property, including any mortgage costs, this is called ‘positively geared’, and is your profit.

  • Capital gains over time.  If the property continues to appreciate in value over time, you’ll be earning capital gains on the property you kept as an investment.

  • Tax deductions.  Keeping an investment property gives you the opportunity to claim tax deductions. For example, you may be eligible to claim any interest you pay on your loan as a tax deduction, as well as costs associated with maintaining the property.

  • You can use your equity. If you’ve built up equity in your property, you may be able to utilise that towards the deposit on a new home. Keep in mind you’ll need to make sure you can afford to service both the mortgage on the new property, and any amount you’ll need to continue paying towards your current property if the rent you receive (assuming you rent it out) doesn’t cover the full amount.


Use your calculator to work out your home equity.

 

 

Investment property expenses to consider
 

  • Bill payments. As the owner of the property, you’ll still be responsible for paying certain bills, including utilities such as water, as well as council fees.

  • Landlord insurance. You may need to pay landlord insurance, which can include building insurance, landlord contents insurance and property owner liability insurance.

  • Strata fees. If you own an apartment, townhouse or villa, you will be responsible for paying strata fees that go towards building and common area maintenance.

  • Real estate fees. You may need to pay property management fees if you use a real estate agent to manage the property on your behalf.

  • Maintenance and renovation costs. Pretty much every investment property will require ongoing maintenance. And if your place is a little older, you may need to make more extensive renovations.

  • Rent shortfall. If your home loan repayments and ongoing property costs are greater than the rental income you’re generating, then you will need to cover the shortfall.

 

 

Extra tools and resources


Stamp duty calculator

This calculator estimates how much stamp duty and lenders mortgage insurance you may have to pay when buying a property.

Calculate stamp duty

Home equity calculator

Estimate the amount of usable equity you have in your current property and understand your options for buying your next time.

Calculate your equity

Mortgage calculator

Calculate how much you could afford to borrow, based on your financial situation.

Mortgage calculator

Repayment calculator

Calculate how much your home loan repayments would be with different kinds of mortgage set-ups.

Repayments calculator

 

To sum up

  • If you want to renovate, first have a clear strategy about what you want to achieve (to rent, to sell, to stay) and set a budget.
  • One of the greatest risks of renovating is overcapitalisation – spending more on the renovation than could be gained back when you sell. Talk to a real estate agent or other expert about how you could add value to your home with a renovation before selling.
  • Selling your home rather keeping it as an investment property can make things more simple, as you don’t need to manage multiple properties, and possibly multiple mortgages.
  • Selling your home before you buy another also gives you a clearer idea of how much money you have to work with.
  • If you’re keeping your existing property as an investment, make sure you calculate your ongoing rental property costs, such as maintenance, property manager costs, and how much of the mortgage payment isn’t covered by the rental you receive.

 


Other guides to help

Keeping your first home as an investment

Things to consider around keeping your home as an investment property, renting it out, using your equity to buy a new home, and more.

 

What’s the cost of selling a house?

From real estate agent fees to lender fees and conveyancing – if you’re an Australian homeowner, here are the selling costs and fees you need to budget for.

 

Should you sell before you buy your next home?

Is it best to sell your property before you buy the next one or buy before you sell? Explore options including a bridging loan that could help to manage the process.

 

Things you should know

Credit criteria, fees and charges apply.

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.