Overcapitalising – we hear about it all the time but what does it mean?
I’m sure you’ve heard the term ‘overcapitalising’ – it’s mentioned on every home renovation show in Australia. But what is it and why should it be avoided?
While adding a new kitchen or deck can add value to your home (and enjoyment for the home owner) – overcapitalising can end up costing you more than you had planned. Here is a closer look at what we mean by overcapitalisation, why it should be avoided and and still manage to increase the value of your home.
In simple terms – it basically means that the cost of a home renovation is more than the value it added to your home. In example – if you buy a home for $400,000 and spend $50,000 on a new outdoor living area with a fancy deck and nice landscaping – it doesn’t mean the property will now be worth $450k. If comparable properties in your area are selling for a maximum of $425,000, your renovations are unlikely to increase the selling price above this – you’ve probably overcapitalised.
Why should you avoid overcapitalisation?
Australians love putting time and money into their properties. However, while some renovations can increase the value of your property there’s generally an upper limit on what homes are worth at any given moment. If you find yourself in the dreaded situation where you have to offload an overcapitalised property at short-notice you could find yourself losing some money on your investment.
How do you increase the value of your home without overcapitalising?
While overcapitalising isn’t a good idea – there are some renovations that can add significant value to a property and give you more bang for your buck. Some areas where renovations can make a huge difference include
– new window furnishing such as curtains or blinds
– a fresh coat of paint inside and outside the home
– new light fittings with up-to-date modern fixtures
– renovating an old bathroom or kitchen
– replacing carpets and new flooring
– adding car accommodation
When it comes to external renovations – the key is to increase the kerb appeal without blowing your budget. Consider your area and the features that buyers or renters would expect. While you may take enjoyment out of having a beautifully landscaped backyard or patio – the next person living in the house may not be so keen on those additions.
Generally speaking – you’ll probably avoid over capitalising if you keep costs down to less than around 10% of your properties value. The less you spend to give it the wow factor – the more you stand to gain when you sell.
Happy reading – and feel free to share with anyone who may find this info useful.
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The information herein is not intended as investment, financial, legal, taxation, building, development or any other advice and must not be relied upon as such. You should obtain independent professional advice and make further independent enquiries before making financial, legal, taxation, building, development or investment decisions.