PROPERTY

How to spruce up your property to increase your property's value

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A spot of elbow grease can work wonders

Your family home is most likely your biggest asset. While its main purpose is a comfortable place to live, it usually pays to improve its value as much as possible. You can take advantage of your home's increased value in a number of ways, including as a springboard to fund other investments.

Or you can sell it and downsize to supplement your retirement nest egg. Bear in mind your home is your only asset that is free of capital gains tax.

how to spruce up your property value

Some home improvements - a granny flat in the backyard or a spare room with ensuite bathroom - will enable you to earn an income but renting out part of your home is likely to modify its CGT-free status.

Other work - from a general spruce-up to kitchen and bathroom upgrades and everything in between - should increase the value, if you do it well and don't overspend.

A granny flat - essentially a secondary dwelling in your backyard to rent out - can be a lucrative investment.

In NSW, the ACT and Western Australia it's a relatively simple process to get approval if your property meets certain criteria. But in Victoria, Queensland and South Australia you generally cannot rent out a secondary dwelling on your property. This may change, so check with your local council.

A lack of affordable accommodation in suburban Sydney has seen strong rental yields achieved for granny flats in areas of high tenant demand. In NSW you need a minimum block of 450 sq m and the new dwelling must be no more than 60 sq m in size.

In WA the block size is the same but the granny flat can be up 70 sqm and in the ACT your block must be at least 500 sq m and your new dwelling can be as big as 90 sqm. A whole industry has sprung up around designing, gaining approval for and building granny flats.

Examples of two-bedroom, high-standard dwellings costing around $100,000, renting for $400 to $450 a week and yielding over 20% can be found around Sydney. As these are new dwellings investors can also claim depreciation.

But granny flats are not straightforward to build on all properties, such as those where the land slopes or access is difficult. And make sure you are in an area with strong tenant demand before you outlay the money to build a secondary dwelling.

If you do rent out a granny flat, or even a room in your main home, you will need to declare the rental minus any deductible expenses, such as interest on the money borrowed to undertake the improvements, as part of your taxable income.

When you sell, your main residence will no longer be totally CGT-free. Land tax would be calculated on the property and apportioned between the main residence and the granny flat or rented rooms. Tax would be based on how much of the total space is leased out and for how long.

Improving your home through renovating needs to be carefully planned so it won't backfire. No one wants to spend $50,000 and add only $25,000 of value. Ideally you want to see a $2 value increase for every $1 spent.

Start by looking at prices achieved by nearby renovated houses. If they are selling for $100,000 more than yours would fetch, a $50,000 makeover could be justified. But if they are only bringing $20,000 extra, scale back your plans to a $10,000 renovation. Instead of a brand new kitchen, replace cupboard doors and handles and add some classy but not too expensive fittings, including lights. In the bathroom you can resurface the bath and vanity, respray tiles and maybe add a new shower screen.

Never underestimate extra storage, spotless surfaces and sprucing up the garden. The main cost is simply elbow grease.

Spring clean your loan

As we start to come out of winter "hibernation", many people take the chance to spring-clean the house.

This year it might also be worth considering spring-cleaning your home loan. Over the life of a loan interest rates can change a lot, and as one of the largest monthly expenses it is always worthwhile taking time to check your home loan.

At the moment interest rates are extremely competitive, and in some cases fixed rates are well below variable rates, so it could be worth investigating fixing at least some of your home loan. Of course, you will get the best result from doing your research and speaking to different lenders about the options available.

So start spring-cleaning your home loan now and your summer will be so much more relaxing. You might even have a few more dollars in your pocket for the holidays.

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Money's founding editor Pam Walkley stepped down in early 2015 after more than 15 years at the helm. Before that she was at the Australian Financial Review for 11 years, holding several key roles including news editor, chief of staff and property editor. Pam is now a senior writer for Money.
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