What is overcapitalising?
Overcapitalising refers to the process of improving property beyond its actual value. For example, spending $100k renovating the kitchen and bathroom of a $600k property, doesn’t automatically mean the property is worth $700k. A sale price of your property is always going to be determined by what someone will pay for it. The ‘value’ that you have added to the property in your assessment may not be the same in the eyes of your potential buyer.
It is common for Real Estate Agents to tell their vendors (sellers) not to do any renovations as a buyer often likes to make changes/upgrades to personalise the space.
How to avoid overcapitalising
It’s easy to get carried away with renovating and believing that the hard work you are putting into improving the house will actually generate an increase in value. Being aware of your local market and what similar properties are selling for in your area is key to gaining an understanding of what your property may be worth. Understanding the median house prices or similar sale price of your property can provide you with a base to work off when deciding how much to spend on your renovations. You can acquire a full property valuation through multiple streams such as your Mortgage Broker, Real Estate Agent, your existing lender and or independent agents.
As a general rule, it is recommended that no more than 10% of the property’s value should be budgeted for aesthetic renovating.
What areas are likely to increase the value of your property?
Specific improvements such as the following are most likely to add value to your property;
- Kitchen renovation
- Updating or replacing floors and carpet
- Bathroom modernisation
- Updating lighting and fixtures
- A fresh coat of paint
With many people continuing to depend on property investments to meet their financial goals, it’s important to make sure you have the right information and tools on your side. Running your plans by an industry professional before you start the work will ensure you maximise your profitability of your asset.