Inspired by the popularity of small-screen home-reno shows - from The Block and House Rules to Masters of Flip and Grand Designs - many Australians harbour the dream of being renovation superstars.

But away from the bright lights and TV fame, there’s a lot to consider when buying a run-down property to renovate, particularly if you’re a first home buyer.

So are you better off buying a near-new or newly renovated property, or could you achieve that dream reno of the worst house in the best street? Here are some things you need to weigh up.

Consider the cash and overcapitalising

A key problem home owners can face when renovating is the chance to overcapitalise - when the cost of the renovation outweighs how much value it will add to a property, leaving you out of pocket. For example if you bought your home for $440,000, spent $100,000 on renovations and urgently had to sell for $500,000, you’re going to be in the red by $40,000.

Karina May, editor of ServiceSeeking.com.au, recommends that if first home buyers choose to renovate they should avoid taking risks and spend conservatively.

“To make sure you don’t overcapitalise it’s a good idea not to spend more than 5% of the purchase price on renovations,” she said.

Therefore, based on the current median house price in metropolitan Adelaide of $440,000, the renovation budget shouldn’t be more than $22,000.

To avoid overcapitalising consider the quality and standard of surrounding homes and take note of how much they are selling for. Suburbs will generally have a ceiling value, meaning there is a certain threshold buyers and renters are willing to pay. Take for example these two homes in Magill, a suburb in Adelaide’s east.

Property A: a two-bedroom, one bathroom, one carpark unit, which is in need of an upgrade. The property is on the market for $329,000.
 
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Photo source: realestate.com.au

Property B: a two-bedroom, one bathroom, one carpark unit. The property has been renovated and is on the market for $371,000.
 
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Photo source: realestate.com.au

While the renovation costs for the property are not public, based on information from Home Improvements you can expect to pay between $10,000 - $22,000 for a small or budget kitchen. This figure is based on the assumption that a new kitchen includes all new appliances, plumbing and electrical installation. For a cosmetic makeover or small bathroom renovation using budget materials and fittings it likely to come in between $5,000 and $15,000.

To upgrade the kitchen and bathroom of ‘property A’ you would be looking to spend $15,000 to $37,000. Keep in mind that this does not include painting the walls or updating the floors, which could add thousands more.

If you paid near the top end of the renovation budget, painted the home and updated the floors, you would run the risk of overcapitalising. If you unexpectedly had to sell the unit, or there was a downturn in the housing market, you could be left out of pocket.

When you’re buying a near-new or newly renovated home it’s also important to make sure you don’t over spend. When you have your heart set on a property quite often your emotions can get the better of you and you could offer more than it’s worth. To make an informed offer, or to know your limit when bidding at auction, study other comparable properties in the area.

Get into your own home sooner

Budget blowouts

When renovating there is always the chance your budget may blowout.

“For this reason, it is exceptionally important when you begin a renovation to be clear about what you want so that your builder can quote accurately. And ensure you add an extra 10 to 15% on to your budget estimation to cover any unforeseen costs,” Karina said.

On the other hand, if you buy a newly renovated home, you know the price tag and are less likely to encounter nasty budget surprises. While there is still some risk of a budget blowout when building a new home, your contract with the builder should provide some security against extra costs.

Hidden surprises

When looking at a run down home to buy and renovate, it’s important to obtain a building inspection so you can uncover potential structural problems such as salt damp, severe cracking and white ant infestation, or the need for expensive plumbing and wiring. These issues will add further costs to your renovation.

If the home is heritage listed there are limitations on what you can do to the home and how you can do it. Councils also have tight development approval processes, which could stand in the way of your dream home.

While you would hope newly renovated homes wouldn’t come with hidden surprises, it’s also a good idea to seek a building inspection on these properties. Even though the bathroom is new, plumbing problems could exist, or beneath the freshly painted walls, there could be severe cracking.

Time and emotions

Like our favourite contestants on The Block and House Rules have shown us, renovating is exhausting and can be an emotional rollercoaster. With timelines changing, budget blowouts, hidden surprises and plans not coming to fruition, creating your dream home can be stressful.

Needless to say that if you move into a newly renovated or new home, all you need to do is unpack and enjoy your new life as a homeowner.

The good news on renovating

Yes, a renovation can be stressful, time consuming and expenses can creep up – but it’s also a very rewarding experience. A renovation gives you the chance to roll up your sleeves, get into some good old DIY and your hard work can also have a profitable outcome.

When you buy and upgrade an old home, you can retain the craftsmanship, heritage and character of the home. Homes built circa 1900 with original architectural features, such as arches, high ceilings, wide hallways, or stained glass windows, and with renovated kitchens and bathrooms, are in high demand in the current Australian housing market. Older homes also tend to be positioned on larger lots, in comparison to new homes, units and town houses, and are also likely to feature established gardens and neighbourhoods.

Take away message

With a clear plan, strong mindset and the right changes made to the home you can add considerable value by renovating a bargain property, while also achieving their dream home.

But, like all things related to owning a home, the number one priority is ensuring you’ve carefully thought through and are comfortable with your decision, and are not overextending your financial position.