Overcapitalising, find out what it is and how to avoid it

As a homeowner you might think it is a great idea to do some things that will help to add value to your property whether it is for your own home that you and your family live in or even your investment property you are looking to update and revamp with some new additions. With this in mind it is crucial you don’t overspend on new property updates or additions because if you over capitalise on your spending this can actually end up costing you money with no financial gain or any real benefit in your properties value.

Overcapitalising is where the cost of a home improvement or an addition adds up to and costs just as much or more than the value it adds to a particular property. It is important to not get caught up in the ways of updating or adding to the property for self-want or satisfaction if there is going to be no financial gain or any real benefit at the end of it, especially if you have no intention to hold the property indefinitely. If you do find yourself to be in the position where you have invested a large amount of funds into your property don’t be too disheartened come time if you decide to get a valuation done on your property only to find the new additions have not added at a minimum of what you have spent to the total property value. There will always be a maximum upper limit as to what your property is worth at any given time based on what the market is doing and how it is tracking. Basically if houses in your suburb or street are only selling for set average amount then it is likely all your hard work on renovations and large sums of money spent will be overlooked in a sense and you will be in a position of losing money. Geelong based property broker Andrew Monk notes that overcapitalisation can be a problem for both renovating existing homes and building new homes – so always work out your costs and potential end value before proceeding with a new build.

How do you avoid overcapitalising from the start?

  • Buy a house with a value at the lower end of what can be seen elsewhere in the suburb or chosen street.
  • Make sure pre-purchase inspections are carried out so you’re aware of any potential costs with regards to unseen structural issues.
  • Note down your renovation plans – seeking professional advice from a professional can be a good idea if you are unsure on where or how to start.
  • Beware of going overboard with expensive fittings, fixtures and finishes.
  • Don’t get emotionally attached to the process.
  • Be clear on the purpose of the property – a swimming pool may be desirable for your lifestyle but may not add value when it comes time to sell.
  • Do your homework on what comparable houses are selling for and take your renovation plans into consideration along with the costs involved.
  • Stick to your set budget and save on spending where possible.
  • DIY jobs are not necessarily an avenue to save money, in some cases it can actually cost you more if you have to employ the services of a professional to redo the job.

Additions and improvements that will help add value to a property without costing the world:

  • Fresh coat of paint and maybe even a colour change to something more modern, paint can be purchased from your local hardware store for an affordable price and spend a weekend or two painting away, otherwise using cost competitive painting services if you’re limited with your time can still be beneficial.
  • Update window coverings such as curtains with something modern or a new style blind to go with a fresh new colour scheme.
  • Add Roller Shutters to the exterior of your home, be mindful to shop around for the best price as there are companies who are charging double the amount of others. Not only will this add level of security but will also assist with lower electricity bills in them hot summers and cold winters.
  • Update light fittings and style of lights to something fresh and modern, once again local hardware stores or lighting shops have variety at affordable pricing -however if electrical items are to be touched and altered such as new light fittings or switches to be rewired a qualified electrician should be contacted for this.
  • Recoat wooden floors with a new lacquer, this may require little prep work such as a light sanding that can be achieved by hiring a floor sander from your local hardware shop, or quote up new floor coverings such as floorboards, carpets or tiles.
  • Renovate your wet areas such as Laundry and Bathrooms with fresh coat of paint, some new tapware and maybe some updating tiling.
  • Renovate your kitchen or give it an updated feeling and look by applying a fresh coat of paint to walls and possibly the cupboard doors and draws and update the tapware.
  • Add a carport or an enclosed garage to your property, there are a number of companies who offer simple to DIY install kits such as for carports however if you need contact a professional to help make this happen from your local area.

It is important to consider all your costs involved with carrying out a renovation prior and is absolutely important to do your homework and research prior to make sure you completely understand what you are getting yourself into and to ensure the most cost effective decisions are made. If your home is worth $300,000 before any renovations have taken place and you have calculated you will spend $160,000 in renovation costs, but houses in the area similar to what your end result is destined to look like are only selling for $400,000 it is important that you reconsider and go back to the drawing board to reassess the overall extent of your renovation.

If you need recommendations for a professional or have a question regarding anything spoken about in this article please don’t hesitate to get in touch with Gerry today.