Case Study: Kensington
Updated: May 5, 2021
An amazing view of a local church influenced the design of our new living space.
Buying a newly renovated home is one option. But another option is to improve your property in stages; letting your equity build in between.
Playing the long game
When we were looking for our second home, we already had our son who was 12 months old and a second baby on the way.
We were bursting at the seams of our 2 bedroom floorplan and looking for something bigger than our 150m2 block in North Melbourne so our kids could enjoy a bigger space outside.
After enjoying the renovation project on our single-fronted Victorian terrace we were already keen for another project (crazy, right?!).
Well, Boy! Did we find one!
Here she is, in all her original and '1950s modernised' beauty.
Now that you've seen the photos, you might be shocked to hear that we fell in love with this property!
So what on earth did we see in it? We saw a Hawthorne-brick double-fronted Victorian on a triple block with off-street parking and a rear lane on title. We knew it was a pretty rare find and that it would come up an absolute treat when restored.
The land to asset ratio works explained
The reason we targeted a home needing so much work was in large part due to a concept called the land to asset ratio.
Contrast a home in the condition ours was when we bought it with a home that has a perfectly liveable 20 year old renovation that we'd want to replace quickly. In simplest terms, we'd be paying more for a house in better condition irrespective of whether we planned to keep it as is or update it.
So when we bought our home the value of the land made up a greater portion of the price we paid that the house itself did.
Why does this matter?
Land grows in value, assets decline in value
Investing $1,000,000 for a property where the land is worth $500,000 and the house replacement value $500,000 versus investing the same amount where the land is worth $750,000 and the house $250,000 means that you have $250,000 more of your investment that's growing in value.
When things go your way
We set our sites on this 'diamond in the rough' and set a maximum price for auction day. Our price had factored in a small budget that we knew was essential to make the house liveable.
Even if you think you can live in a hovel, ask yourself will it really be worth it.
Everyone has different standards, so you should know what condition you can live with.
I knew I could not live with the wallpaper and the floor tiles, nor the kitchen or the bathroom in the state they were sold in.
So we budgeted for painting (walls and floors), replacing the kitchen and bathroom with a low-cost option in the short term.
After that we could handle waiting a couple of years to build equity and refinance for a larger renovation.
Remember that your salaries are growing along with your land value and salaries factor in to how much finance you'll be approved for.
Along with your land growing in value over time, in most cases your earning capacity will too, so your lending limit will likely increase to boot.
So things went our way on auction day and we ended up securing the property for well below our maximum, leaving us extra to a complete renovation of the original brick front part of the floorplan (including a new central family bathroom and master bedroom with ensuite) and give the back 1950s weatherboard addition a fresh look and salvaged kitchen (a 15 year old kitchen someone was selling second hand...maybe from a home they'd just bought!
Stage 2 (pictured at top) didn't happen until some 5 years later when our equity position had strengthened and we'd take on more senior roles at work meaning we could refinance to fund the works.
Renovating in stages gives you time to live in your floorplan and understand sunlight and shadow to your home.
One major benefit of not completing the entire renovation in one project was that we gained so many insights from actually living in the home such as seeing how the sunlight came in and what vantage points from the block we wanted to incorporate.
We have a phenomenal view of the most beautiful local church that we only paid just attention to after we'd moved in.
Now we've made it a focal point from the windows in our rear extension and it's turned into one of the hero elements of the design.
If we'd designed and executed the renovation without having living in the house we would likely not have incorporated it at all.
For some it's not always possible to complete a renovation immediately after settlement and that's not only okay but can also have some unexpected benefits.
I understand that not everyone is comfortable taking on a project, but our experience in doing six of them has shown that it can really unlock potential in a property.