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Creating Extra Value

The addition of another bedroom is a tried and true strategy for increasing rent and adding value, Joanna Jefferies writes.

By: Joanna Jefferies

1 June 2020

Renovation expert Jason Tan usually spends $40,000 to $50,000 on a full renovation, including adding a bedroom, which he says increases the rent by at least $100 per week.

Creating value is one of a property investor’s most powerful tools. Along with leverage, it’s what makes property investment so attractive. The easiest way to add value is to improve a house: even a basic renovation can make a significant difference. And in the time of Covid-19, when falls in house prices and rents are expected, the prospect of adding value to an existing property seems even more attractive.

But is it worth taking your renovations to the next level, especially in these uncertain times? Should you really add a room to your rental?

Adding a bedroom has the potential to increase both the value of your property and your rent – in many cases by more than enough to justify the cost. Done well, an extra bedroom can be an outstanding investment. Done badly, though, you could spend a large amount of money and create a less appealing property that’s harder to rent and resell.

What’s The Potential Upside?

The location of your property will dictate how much value an additional bedroom will add. In Auckland City the value gap between a three-bedroom and a four bedroom house is $423,000; in Gisborne the gap is $113,000.

“If you go from a three-bedroom house to a four-bedroom, in the prime markets the cost to trade up is high,” says Kelvin Davidson, senior property economist at CoreLogic. “But that price difference isn’t only the extra bedroom, it might have another bathroom too.”

It’s not simply the extra equity that’s the drawcard, of course. Your rent will also increase and that extra cashflow could service a lot of debt given that interest rates have recently dipped below 3%.

Looking at a selection of suburbs in the major cities, the rent gap between three-bedroom and four-bedroom houses starts at around $40 a week and is over $100 a month in more expensive areas. An extra $50 a week in rent will service $50,000 in debt at 3% interest over 30 years, paying principal and interest, or $85,000 if you go interest-only. If you can add a room for that amount you would break even in a year on the increased rent alone.

‘It’s paramount that you consider the flow. It’s not just taking half the lounge and turning it into a bedroom’ JASON TAN

We know you can add value with a bedroom,” says Davidson. “What we don’t have is the cost side. If you’re trying to analyse this, you’re going to need to be scientific to work out the costs compared to how much value you can add.”

Creating A Valuable Asset, Not A Quirky Mess

Every property and every renovation will be unique. Adding a room can be surprisingly affordable, like simply dividing a large bedroom into two, or shockingly expensive, like adding a double-level extension. Both projects could be outstanding investments or abject failures, depending on how well you execute them.

The Process Of Adding A Room

Any time you move a load-bearing wall or change the structure of a dwelling, you’ll need consent. That means any room addition, unless it’s simply dividing a room in half, will require you to deal with your council and sort out building consent.

“Consult with council early on to find out what you can do. You’ll need to find out about the recession plane, for heights of walls and angles of the roof and so on, as well as maintaining the required percentage of windows and access points in a room,” says Jeremy Gray at BuildersCrack. “Also, check your title for covenants – they can limit what you can do.”

Once you know what you can do with your property, you’ll need to have a design. That will mean engaging an architect or draftsperson to prepare the drawings and all the specifications.

“If it’s just a new room on the side, you’ll probably keep all the existing styling, so that’s cut and dried and you’d probably only use a draftsperson,” says Gray. “For anything more complex you might want an architect.”

Once you have consent based on your drawings, you’ll need someone to manage your build. Doing it yourself is one option but lining up all the tradies in the right order can be both time-consuming and stressful – if you have a full-time job it’s unlikely to be much fun.

And you’ll also need to manage the council inspections. Instead, you could go with a builder who will manage the process and sort out all the subtrades, or your architect could manage it for you and find a good builder.

“Managing all the people is the trickiest part of a build and good communication is essential,” Gray says. “Don’t necessarily choose the cheapest option – choose professional people you can work well with and a design that will add to your house.”

“It’s paramount that you consider the flow,” says Jason Tan, property investor and coach at Ronovationz. He’s helped many of his clients add rooms with excellent outcomes and says it’s a great strategy if done well. “It’s not just taking half the lounge and turning it into a bedroom. You need to think about it from the perspective of the valuer. You also need to be mindful of your future tenants.”

One and two-bedroom units built in the 1960s and 1970s are a great starting point, says Tan. They often feature dining rooms, which aren’t really required in a modern home, as well as large bedrooms and kitchens.

“There’s an opportunity to look at how you can reconfigure the spaces to do internal modifications without touching load-bearing walls,” he explains. That allows you to renovate under Schedule 1 of the building code, without needing consent.

On a unit like that, a full renovation would include paint, carpet, a new kitchen, new bathroom and going from two bedrooms to three. The cost might typically be $40,000 to $50,000, says Tan, but he would expect a rent increase “of at least $100 per week, if not $150-plus”.

Adding a room is also a favoured strategy for iFindProperty’s Nick Gentle he’s added rooms to six of his own properties. He agrees with Tan that a poorly executed room addition can actually detract from a property’s value and rentability. It’s short-sighted to simply slap an angled wall into a house to separate spaces while reducing flow and creating strange corners and spaces.

“You get inefficient quirky layouts – and why would you want a quirky mess when you could do it properly and get a high-value asset? Quirky places are the last to sell and the last to rent, and you want to be the first.”

Successful Additions: Large Scale And Small Scale

“I’ve added a room to a family home and a student rental, as an internal remodel and an extension,” says Gentle. His largest addition was to a double flat in Wellington, which originally had three bedrooms in the upstairs flat and three bedrooms in the downstairs flat, with both dwellings in very bad condition.

He remodeled the property completely and added bathrooms to increase its size to four bedrooms and two bathrooms upstairs, five bedrooms, two bathrooms downstairs. The final cost was around $450,000 – it ran $50,000 over budget. However, because of the near-new condition and the extra rooms, the rent more than doubled, which serviced all the additional debt, and the valuation went from $900,000 pre-extension to $1,850,000 after it was completed.

At the other end of the scale, in 2018 Gentle turned a two-bedroom flat in Levin into a three-bedroom flat for just $3,000. The windows were in just the right place, so only an internal wall was added plus some insulation. Another $10,000 to renovate it with new paint and carpet, and the result was a value increase of $50,000.

If you do add a bedroom, in some cases it makes more sense to also add a bathroom, but that can be surprisingly space-efficient, says Gentle. It takes only three-square metres and makes a world of difference; a four-bed, two-bath place will be a far more rentable, saleable property than a five-bed, one-bath rental.

The cost of building work has risen considerably over the past 10 years and the price of adding a room has definitely been driven up, says Jeremy Gray of Builders crack. He believes this is an important factor in making extensions less popular than they were a few years ago.

“The cost is relatively expensive to extend now as versus historically. What people are typically doing now is building sleepouts or converting garages, which can be a good option. They’re also using rented cabins to add a room. You can buy a mobile cabin for $10,000 or $20,000 and plonk it on a property. You’ll get more rent and you don’t need to worry about consent, but you haven’t invested in the house.”

Value For Money Advice

Adding a room will almost certainly be an expensive exercise, so you want to make sure you spend your money wisely. Gentle says his architect has been an invaluable source of expertise, even at the buying stage.

“I pay my architect an hourly rate to do due diligence on properties I haven’t bought yet. I’ve walked away because he’s told me about proximity issues with walls or boundaries. And sometimes he’s given me great options to avoid angled walls and rearrange spaces.”

Experienced local builders are another source of specialist knowledge. They will often be good at knowing what councils are likely to approve and flagging probable issues with district plans – as well as the structural aspects of the building.

“Work with builders who understand how the home is braced and structured to save you dealing with council,” Tan recommends. “It means you can renovate in four to six weeks instead of three months.”

ABOVE In older houses it’s often possible to reconfigure the spaces and do internal modifications without touching loadbearing walls.

Tan also recommends you have a good relationship with a local valuer, who can help you understand what the local market is looking for so you can tailor your property to fit. Adding a small fourth bedroom to a single-bathroom house in an affluent suburb may not fit your market – but opposite a university it might be a great little money-spinner for the student market.

‘It has been lucrative for me, but the projects can be big and slow. It’s not an automatic good idea. You need to evaluate it on a case-by-case basis’ -NICK GENTLE

A great property manager is another vital member of the team who can help you pinpoint your market. Gentle says he and his property manager went through 20 sets of sketches and revisions on one property, and ultimately settled on an outcome that resulted in one fewer bedrooms, but a good rent increase and an excellent jump in the valuation – “use your team!”.

Adding a room can be an outstanding way to increase equity, raise the rent and lift your property into a new price bracket all at once. There are plenty of pitfalls but done well it can be a winning strategy that you can use over and over again as you increase your portfolio.

“It has been lucrative for me,”
says Gentle, “but the projects can be big and slow. It’s not an automatic good idea. You need to evaluate it on a case-by-case basis.”


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