Overcapitalising – How to avoid this problem. This is a very common word used in both the finance and real estate industry. Many investors and owner occupiers would also be familiar with this term. Overcapitalising is caused in situations where you pay to much on renovations or home improvements. Implementing capital improvements such as laying high quality outdoor decking, changing a gazebo into an outdoor barbecue kitchen or replacing your stone bench tops with marble surfaces are always a nice addition to your home looking all the more sweeter. These wonderful additions may improve the quality of the home but it doesn’t automatically increase the value of the property.
To help explain this further… If you own a property in Melbourne with a street value of $750,000 and other similar properties in your area are selling for $780,000, spending $130,000 on some reservations and/or home improvements doesn’t automatically increase the value of your property from $750,000 to $875,000. You may receive excellent feedback on your property but if you are unlikely to increase the selling price beyond the cost of improving your home, you have officially overcapitalised.
Australian’s and Melbournians alike have a great passion to property. It is very easy for us to take that passion to far and overcapitalise in our property. It’s important to note that certain renovations can increase the value of your home, but there is an upper limit on what properties are worth at any given time. In the event you sell an overcapitalised property you may discover that you’re going to lose money on improvements that weren’t paid for by the buyer.
As our property market evolves and general property needs change, its most certainly important to improve or change your home overtime. As we see new developments hit the market, old properties in the neighbourhood can quickly look very tired and outdated. Some changes that can make a big difference include:
- Painting the internal and external of the home
- Updating the house and kitchen appliances
- Renovating an old kitchen or bathroom
- Replacing new window furnishings
- Restoring your timber flooring
- Replacing carpets (with new carpet or other flooring options)
When looking to improve your sales value, take some time in reviewing your neighbourhood. Learn what the market is looking for and spend within your means. Making some practical changes to your home will be more appropriate than being to extravagant. The less you spend to uplift the property appearance, the more you can expect to get back when it’s time to sell. Always take note on the sale prices of similar properties in your area.
We hope these tips provide you with help to avoid overcapitalising.
For more tips and tailored advice, please contact us or visit our website.
While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you want to learn more, please contact us. We welcome the opportunity to assist you.
May 2018
