There are two types of renovators: those creating a dream home for themselves, and those doing up a property to maximise its value.
When Melbourne couple Nicholas and Emily Tait started renovating their Victorian cottage in Brunswick in September 2015, they were clear this was not going to be their dream home.
"We didn't want to overcapitalise on the renovation," Emily says. "We had to walk that line where you want everything in your own home but have to scale it down, a little bit of luxury but not our dream house."
A smart renovation that pulls the right emotional levers with tenants or buyers can improve the value of a property significantly. There are also tax benefits for investors because they can claim depreciation.
On the flip side, poorly thought-out modifications can sink enormous sums at bank-breaking speeds – money that will never be seen again.
So how do you get it right? Experts say the Midas touch comes with a mix of picking the right property in the first place, knowing what your market likes and expects, and a bit of discipline to keep things on the middle road.
Start with the right house
The Taits got off to a good start when Nicholas bought a two-bedroom workers' cottage in dire need of a face lift, back in 2004.
The house hadn't seen any updates for 30 years. There were dark brown timber cupboards and an old ceramic sink in the kitchen. A hot water heater took up about half of the bathroom and there was a makeshift shack in the backyard.
"It was bits of timber and tin he found at the tip I think, and that was our laundry," says Nicholas.
Picking a period home in an up-and-coming suburb was a good choice. Richard Wakelin, director of Melbourne-based Wakelin Property Advisory, says Victorian and Edwardian homes along with some from the 1930s and '40s are now mostly immune to the highs and lows of housing fads.
"They are timeless in their style," Wakelin says.
He adds the value of the land owing to its location is hugely important and will drive up the value of everything else you do.
The house should have an outer shell you are mostly happy with because adding new external walls is expensive. Wakelin suggests buying someone else's improvements when it comes to "invisible" elements like new stumps, wiring, plumbing and roofing.
"At the end of the day buyers and tenants don't value those elements," Wakelin says. "You really need to make sure your funds aren't chewed up on fixing the invisible things."
The little things
Nicholas rented out the Brunswick property for a while; he says it was "basic but livable". He built up equity and used that to make other investments, and along the way met Emily.
By 2015 the couple decided they were comfortable enough with their financial position to renovate the cottage.
They started by getting realistic about how much the project would cost. They had a vague figure in their minds of $70,000 that they wanted to spend, but discussions and quotes from builders and architects brought this to a more realistic $150,000.
The renovations added skylights, an outdoor deck with bifolds and ducted heating and cooling.
Perhaps the smartest additions were rethinking existing structures. A pantry built into a large fireplace added extra storage. An outdoor studio to replace the shack doubled as a laundry and a home office, and also meant they could use the existing laundry plumbing.
A minor change of layout created a straight walk from the front door to the kitchen and allowed a larger couch in the loungeroom.
"We only moved one doorway to make the house flow right down the hallway," Emily says. "Really everything else we kept the same."
Wakelin says the best bang for your buck comes from the least expensive cosmetic changes such as new carpets, polished floorboards, repainting inside walls in neutral colours, and replacing the cupboard doors and benchtops in the kitchen.
He adds that if you are going to spend money on extending at the rear for a deck and living area, don't short-change yourself. Make it a good size.
"If you're able to create emotional appeal, that can create extra or sizeable premiums," he says.
Know your market
Greville Pabst, executive chairman of WBP Property Group and judge on TV show The Block, says it's important to know your demographic and what is now expected as standard in most properties.
"So often the floor plan doesn't work, it's not functional and that really impacts whether the property is going to be sold or which tenant wants to rent it."
Common problems include not placing the living and kitchen areas – where people spend the most time – on the northern side of the building that gets the sun, having the kitchen tucked away in a separate room, or having a bathroom that comes off the kitchen, not the hallway.
Bathrooms should be at or near the centre of the house so it isn't far for a middle-of-the-night trip from any bedroom. And a second ensuite bathroom is expected these days.
Kitchens, bathrooms and outdoor living areas sell houses, Pabst says, and shine with some good tapware and cabinetry. And with the rise of flexible work arrangements and work-at-home entrepreneurs, a study carries a lot of appeal and doesn't take up much extra space. It can be used for storage if not needed.
"Without a study what tends to happen is you set up on the kitchen table, and that's not really desirable," Pabst says.
Air conditioning is a must in most homes, particularly after this year's extreme hot weather. Fancy kitchen appliances and sound systems appeal in wealthier suburbs but may not bring in what you paid for them in other areas. The same applies to swimming pools.
Careful placement of lighting and the effect it creates is often overlooked, he says.
Green technologies like installing solar panels or LED lighting can help you save money if you are living there for a while, but unfortunately the market probably won't pay more for them, Pabst says.
Talk to an architect
Architect Peter Georgiez of Archicentre sees and cringes at housing mistakes every day.
One pet hate is the slap-dash use of paint or other sealants on surfaces that need to breathe like traditional render or bricks. It leads to a "never-ending cycle of ugliness" as the owner patches and re-patches the bubbling paint or cracks, Georgiez says.
And consider distraction as a strategy when doing up dated-looking buildings like walk-ups from the '60s or '70s, rather than covering everything in texture coat. Fixed shade devices, well-designed eaves and landscaping can make it clear a building belongs to the 21st century.
"Sometimes it's about allowing the building to remain true and confident rather than making it look like an old tart," Georgiez says.
Wait for the money
For the most part, the Taits' discipline paid off. Their renovation was finished on-budget in September last year, albeit with a time blowout of about nine months.
The couple had moved in with Nicholas' parents in September 2015 for what they thought would be three months, but it turned into 12 months.
Time will tell how much their efforts were worth.
Understand the tax situation
If you want to try your hand at house flipping, there is more than just the renovation at hand that you need to worry about. How the property is taxed will play a major role in whether you come out ahead.
The first big hit is stamp duty, which needs to be covered on every purchase before you can break even. But how much capital gains tax you pay is also a major consideration, says Mark Chapman, tax communications director at H&R; Block Tax Accountants.
The best way to avoid the CGT trap is to live in the house while you renovate, he says, and take advantage of the CGT exemption for main residences. The sale will then be tax free.
But living in a building site isn't for everyone, particularly those with families. If you don't want to live there you can simply hold it for at least 12 months and claim the 50 per cent CGT discount.
"That means that you have to balance quick turnover with a higher tax bill," Chapman says. "Also, try not to flip more than one house at a time. If you do, you could be treated as a property developer."
You would then be subject to income tax on the profits of your development instead of CGT, he says, but would be able to offset the renovation costs, cost of borrowings and any other "cost of business" you incur.