Economics of extending

mwpt

chucknorris wrote: »

Getting what you want, counts for a lot.

We don't actually need any extra space, the reason that I was/am considering extending is that our 3 bed house isn't particularly large, yet it is on a large plot, and in a good street, and there is a shortage of good 4/5 bed detached houses here in Dorking. As we will probably move in later years, it makes sense to get the max value by extending. But I don't fancy going through all that disruption, I suspect that we will at some point, but at the moment it is always 'next year'.

This post from another thread caught my interest. I have two questions.

I bought a smaller houses than I wanted at a lower price than I could afford, due to my risk averse nature. But it has a fairly large garden, enough to extend down floor outward by 4-6m. This was always my plan but not before I'd got my finances back in order (large buffer). Costs of extensions in London are a lot higher than doing the same further north, or so I'm told, and rising. I'm not confident that the economics makes sense just yet. The premium that houses with extensions go for round here is perhaps just over the break even point. And we have no real need for the extension just yet. So the question is, at what point does it make financial sense to extend? Delay it as long as possible seems to be my answer, from a pure financial view. Any differing views?

Second question is for Mr. Norris. What is Dorking like? I have friends who are looking to buy. They want a freehold rather than leasehold and looking for 2+ bedroom house. If they'd bought two years ago at the same time as I did, they could have bought in my area in SW London, but they're now not able to afford the stuff that is coming on the market. I took at look at rightmove and there is stuff in Dorking seems within their budget. It's a big move further out for them particularly since they need to commute to London (53m train just to Waterloo). Do you know if one could get a seat on that train at peak times? 53m is a long time to stand. Are there any areas to avoid in Dorking? Or areas to look out for? If they're going outward, does it make sense to look somewhere like Woking or Farnham where the commute is faster?

Thanks

princeofpounds

So the question is, at what point does it make financial sense to extend? Delay it as long as possible seems to be my answer, from a pure financial view. Any differing views?

Financially, the answer would be when the rate of the return of the project exceeds your cost of capital.


Putting the jargon aside, it makes sense to do it if the value uplift is greater than your costs (both direct and indirect, such as the cost of debt you take on to fund it), and the proifit compensates you for the time and disruption, and what else you could have done with the money (the 'opportunity cost').


Personally, it makes sense to do it when you need the space.


It can be expensive in London; unfortunately trades just are (and getting reliable ones are even more of an issue!).


Oh, and Dorking is nice (the countryside around it is great - the North Downs has views across the Weald). But there are better commutes. If you let us know what they want from a town then would be easier to suggest alternatives.

mwpt

princeofpounds wrote: »

Financially, the answer would be when the rate of the return of the project exceeds your cost of capital.

Putting the jargon aside, it makes sense to do it if the value uplift is greater than your costs (both direct and indirect, such as the cost of debt you take on to fund it), and the proifit compensates you for the time and disruption, and what else you could have done with the money (the 'opportunity cost').

Personally, it makes sense to do it when you need the space.

Yes. We do not need the space right now, it would just be nice. If it costs, for example. ~£50k to extend, that adds to my mortgage costs or reduces the income I can generate from that £50k in other investments. So it seems to make sense to delay extending until we really need/want to, or if it makes sense if we're selling (which we're not). Unless the costs of building the extension are rising at the same pace as the added value.

Oh, and Dorking is nice (the countryside around it is great - the North Downs has views across the Weald). But there are better commutes. If you let us know what they want from a town then would be easier to suggest alternatives.

Yup. I had a look at Dorking just out of curiosity after seeing chuck mention it. The houses look nice (on rightmove at least). But the commute would be tough. Is the town a sociable place out of interest?

I don't want to disclose too much of their situation on the web. Also, I don't know their exact requirements or budget. Here is an example of the sort of place they might like, but is out of their budget (I believe).

http://www.rightmove.co.uk/property-for-sale/property-52515037.html

At the moment they're not looking further afield but are focusing on zone 4-6 areas in SW London. Kingston, Surbiton, Tolworth, New Malden, Worcester Park, etc.

chucknorris

mwpt wrote: »

This post from another thread caught my interest. I have two questions.

I bought a smaller houses than I wanted at a lower price than I could afford, due to my risk averse nature. But it has a fairly large garden, enough to extend down floor outward by 4-6m. This was always my plan but not before I'd got my finances back in order (large buffer). Costs of extensions in London are a lot higher than doing the same further north, or so I'm told, and rising. I'm not confident that the economics makes sense just yet. The premium that houses with extensions go for round here is perhaps just over the break even point. And we have no real need for the extension just yet. So the question is, at what point does it make financial sense to extend? Delay it as long as possible seems to be my answer, from a pure financial view. Any differing views?

Second question is for Mr. Norris. What is Dorking like? I have friends who are looking to buy. They want a freehold rather than leasehold and looking for 2+ bedroom house. If they'd bought two years ago at the same time as I did, they could have bought in my area in SW London, but they're now not able to afford the stuff that is coming on the market. I took at look at rightmove and there is stuff in Dorking seems within their budget. It's a big move further out for them particularly since they need to commute to London (53m train just to Waterloo). Do you know if one could get a seat on that train at peak times? 53m is a long time to stand. Are there any areas to avoid in Dorking? Or areas to look out for? If they're going outward, does it make sense to look somewhere like Woking or Farnham where the commute is faster?

Thanks

If you are extending purely for financial reasons (like I would be) then you have to genuinely add value, I was pretty sure that I would if I extended, but I still had an estate agent around, to see if he added anything that I hadn't thought of (he didn't, but it didn't hurt to ask). If you are extending because you need the space, obviously that it is a different calculation (due to stamp duty, estate agents fees and solicitor's feed etc. that would be expended on buying another property).

Dorking is good for getting a seat, the 'Southern' trains have plenty seats (they come from Horsham) so have only been through a few stops before Dorking, they go to Victoria. The 'South West' trains start at Dorking so a seat is guaranteed, not only that but they are waiting on the platform for quite a few mins before setting off (5-10 mins) so in the winter, you are not waiting on a cold platform. The SW trains go to Waterloo. They both run about twice an hour, if they wanted a higher frequency they could consider Leatherhead, more train pass through there because the trains from Guildford also travel through Leatherhead, you would almost certainly be ok for a seat too from Leatherhead.

Hope that helps.

michaels

Suppose that 50k build adds 50k to the value so has no net capital copst but obviously there is the cost of tying up more capital in your house. 50k at 3% = £1500 pa or 125 a month - would you pay 125 a month for the extra space or actually would you rather thave the same space and 125 a month to spend on somethign else.

One final thought - where we are there is a big premium for 'just rerfurb to designer standard houses' - ie 3 bed semi 600k, 3 bed semi with 50k refurb 750k - yes people really would pay an extra 100k not to have to have the work done themselves. For you situation this might suggest getting the work done just before you plan to sell so you are selling pristine in order to get that premium.

princeofpounds

I think they might find that Surbiton offers more than Dorking does, based on what you hint about their preferences.


(I don't think you need to give us especially invasive information to help us be useful - don't really care if they want to ride horses or drink cocktails!)


Surbiton has an excellent commute (20 mins, lots of trains), is quite convenient itself with lots of shops and Kingston (with a full shopping and social scene, theatres etc.) is walkable.


But if they want countryside (and it sounds like they don't, day-to-day) it doesn't do that.

mwpt

princeofpounds wrote: »

I think they might find that Surbiton offers more than Dorking does, based on what you hint about their preferences.

Oh, they'd prefer Surbiton to Dorking, no question. They are specifically looking in these areas. But Surbiton central is just completely out of their budget, and even the lower priced areas that I mentioned are now rising out of their price. They have to compromise on something unfortunately, I was just wondering if moving outward was an option. Since they're friends of mine, I hope they don't

They are in their early 30s and still house sharing. If they could put up with that for another 2-3 years I might advise them to buy something like this and rent out two of the rooms to lodgers to pay off quite a chunk of the extra cost:
http://www.rightmove.co.uk/property-for-sale/property-55376561.html

But I don't think they could afford it. Maybe on a BTL mortgage :undecided

EDIT: Errr, scrap that. The place above has just one bathroom and it's off the kitchen.

westernpromise

mwpt wrote: »

Second question is for Mr. Norris. What is Dorking like?

Presumably one would have to have dorked quite frequently over a period of time to have a view on this.

cells

I would have it done sooner rather than later.

Build costs will generally go up with at least wage inflations and possibly more (due to regulation inflation)

So if the money is sitting in a savings account paying 1% its better that it sit in an extension which would cost 3-6% more year to have built.

Also you gain from the value of the additional space. Plus if you are on a higher LTV bracket the extension could add value and drop the LTV bracket to the cheapest 60% price points

Plus there is the social good of adding demand and jobs from spending however much on the extension.

PasturesNew

I am considering putting my wellies on in about 2 hours' time and trudging along the High Street, with a copy of my house details from when I bought it, to try to find out if agents think there's any point in me extending my house.

The house has enough room upstairs (2 beds), but downstairs has an annoying/peculiar layout and some "nice to haves" missing.... and I have a side strip (say 2.75m) where I could simply move the loo to, throw in a shower (large enough to hold the airer full of drying clothes), move the washing machine to, add a big/utility sink and still have enough room left over as a small 2nd reception (2.75m x 3m, say).

I'd use that space as a hobbies/craft room and utility storage space for the 101 things one accumulates (ladder, clothes airer, ironing board, laundry basket, cleaning materials, mops, brushes, vacuum, most used garden folding chair/s, rotary line (to save me unlocking the shed and getting it out), tools, coats/shoes, buckets and bowls, recycling stuff, etc etc). I could always "dress" this as a 2nd reception when I do sell it, sticking that lot into the shed and nooks/crannies just for the sales pitch.

It'd also provide a more attractive entrance to the front (doubling up as a small conservatory/sunny spot) and a "proper back door" to the rear. I also hope it'd solve my "perpetually windy in garden, so it's unusable" problem, as the wind whips up that area something wicked! 24/7, 365 days/year. Makes the whole garden unusable.

It also means I extend my living room, internally, from being 11'x12' to 16'x12' and bring more light into the living room through what's currently the downstairs loo window (so wasted).

The alternative is to spend a lot of time (and some money, and decisions, and trudging round) to get the house into a saleable condition (some minor DIY work, a bit more styling rather than junk shop backroom) ... then go through the pain of being on the market, then the pain of choosing another, then the angst of waiting and the stress of moving.... at a cost of about £10k, just to end up with another house that also doesn't quite have what I'd like.

At the moment, I'm thinking that I should just stay/extend and be done with it.... easier than the hassle of moving/choosing somewhere else.

While the house/plot could take a 4-bed 2-storey extension, I've no need for that -and- I don't believe any uplift in value will be gained as it'd not have enough outside space for somebody wanting a 4-bed house, nor enough parking. I don't want/need 4 beds, so "no need" to do that. I think a well-planned extension on a 2-bed house, in this location, would outperform (financially) a 4-bed on the same plot (bizarrely, some might think)

chucknorris

PasturesNew wrote: »

I am considering putting my wellies on in about 2 hours' time and trudging along the High Street, with a copy of my house details from when I bought it, to try to find out if agents think there's any point in me extending my house.

I wasn't asking an estate agent if there was any point in extending my house, I was asking if I build a large lounge and master bedroom with an en suite, plus a few other minor changes (as discussed). Would it add £XXX value (as I anticipate, because currently I think it is worth £xx and I estimate that the improvements will cost £xx). There wouldn't be any point in proceeding, if it didn't add sufficient value to cover the expense, disruption and profit. What an extension costs, and the value it adds are not the same thing.

I treat anything that the estate agents says about added value, with caution, but it would obviously still worth hearing. However I wouldn't trust him with the estimate of costs as far as I could throw him, but then I am a quantity surveyor.