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How much should you really be spending on renovation works? That is the question on the minds of new homeowners. Videos on Tiktok and YouTube are known to induce serious home envy, and blowing a hundred grand on renovation works is starting to seem like the new norm. But do you really need mermaid tiles in your bathroom, and granite flooring for the entire home?
Is $100,000 too much?
Say, you just paid $400,000 for a new home. A $100,000 renovation job is already a quarter of that money. Seems excessive, doesn’t it? Of course, if you are planning to stay in this new home for the next 20 years, it might be justified. But reality is seldom the case. More realistically, it would be sold in 5 years after your MOP. This means that for your renovation costs to break even, the value of the house has to rise by 7% within this time.
Furthermore, you don’t need to be an accountant to know that home renovations only depreciate. Following a straight line of depreciation, an expense of $100,000 suffers a loss of $10,000 every year. Understandably, these numbers are easily obscured by the excitement surrounding a newly renovated home. For many homeowners, it is their pride and joy - a milestone moment they had wiped out most, if not all, their CPF monies for. But once the housewarming parties and home tour videos get old, it starts to lose its shine. From a value perspective, we would go as far to say renovation works start incurring losses the moment they are completed.
Are all renovations sunk cost?
But it needn’t be all doom and gloom. While most renovation works - like stoves and toilets - fall under the “sunk cost’ category, there are exceptions to this rule. Like hacking the walls to open up a floor plan. This decision, particularly in smaller spaces, may well increase its value down the line. When a home is switching hands, floor tiles with laminates and vinyl, which can be easily removed sans wholesale demolishment, also spell savings and value for prospective buyers down the line.
That said, renovation choices that are highly customised may be hard-pressed finding buyers who can appreciate them. Your Supreme or Hello Kitty furnishings may enjoy their moment of fame on social media, but it will probably narrow your target audience significantly. Still, though we’re all for being preemptive, the purpose of renovation boils down to a single word - utility. You’re better off making choices based on your lifestyle than its potential resale value. When push comes to shove, you can always learn a thing or two about home styling.
What’s the magic number, then?
We think it’s prudent to spend only 10-15% of the amount you spent on your home. That’s somewhere between $50,000 to $75,000 for an HDB flat or condo that costs you half a million dollars. This number accounts for inflation, which averages between 2-3% a year, which means that your renovation’s depreciation is “countered” by your home’s appreciation. In other words, you get to make use of your renovations for “free”.
It goes without saying that there are renovation works you can’t avoid even if you tried. For example, if you were purchasing an old home, it is only smart to rerun the electricity and water pipes. You may even choose to gut its organs out and start on a fresh slate. Or, to afford a new home within your budget, you may have sacrificed a couple of criteria on the checklist and planned to remedy them during renovation. Perhaps you didn’t land an ideal facing direction, but surely you can heat-proof your home later on.
At the end of the day, price and worth can be very different things. What matters is that you plan ahead, consider both form and function, and discern between needs and wants. After all, a home is about the people - not things - in them. For more insights on budgeting for your new home, reach out to me (Harvey Chia) at 9199 9141.
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