How to Avoid Overcapitalising on Your Investment

Aussies love investing in their homes. From new kitchens, to bathrooms and outdoor areas, home improvements can increase the enjoyment and value of your property. However, overcapitalising can end up costing you more than you planned.

Overcapitalisation is when the cost of a home improvement is more than the value it adds to your property. For example, if you purchased a property for $400,000 and spend $70,000 on a new outdoor area, it doesn’t automatically increase the property value to $470,000. If similar homes in the area are only selling for a maximum of $420,000, it is unlikely that your property will sell for more than that.

Overcapitalisation should be avoided whenever possible as you may end up losing out on your investment.

But how can you avoid it?

•    Start with an evaluation

To get an idea of how much your property is worth, get it valued by a professional. They’ll be able to determine how much the price has changed since the initial purchase. Once you know the properties worth, you can narrow down the amount of money you plan to spend.

•    Consider the neighbourhood

Review the surrounding homes; from there you’ll be able to have an idea of the ceiling value, meaning a threshold that buyers and renters will be willing to pay. Depending on your area, and the house itself, you will need to tailor your renovations to suit; luxury mansions require different renovations compared to starter homes to attract potential buyers or renters.

•    Create a budget

Beginning your renovations without a fixed dollar amount in mind provides a recipe for overspending. You’ll need to formulate a budget based on the evaluation, as well as the limit you want to spend. A general rule of thumb to avoid overcapitalising is keeping the cost less than 10% of the property value. The less you need to invest in giving your property the “wow” factor, the more you can expect to gain when it’s time to sell.

•    Make strategic renovations

It’s easy to make the renovation of a property a personal affair – however, you need to make sure the improvements make financial sense and appeal to a wider audience. Be willing to set your personal preferences aside and think about the kind of renovations that will bring the most value to your home. Stay away from making renovations that limit your future renters and buyers.

While overcapitalising is never a good idea, there is no doubt that the right kind of renovations for your property will make a difference value-wise. Some of the low costing differences you can make include: putting up new curtains or blinds, adding a fresh coat of paint, updating your light fittings with modern fixtures, refinishing floors/replacing carpet and adding an extra carport or garage.

The key to avoiding overcapitalisation lies in enhancing curb appeal without exceeding your budget. In most cases, it pays to be practical. With many people continuing to depend on property investments to meet financial goals, it is important to make sure you have the right tools and information on your side.

At Select, we offer no-obligation, quality and free advice to help you to reach your financial goals. Give us a call on (08) 9417 3399 to talk to us about how you can unlock the full potential of your home or investment property.