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Simply put, overcapitalisation is when the cost of a home improvement is more than the value it adds to your property.
For example, if you buy a property for $500,000 and spend $100,000 on a new outdoor kitchen area with timber decking and fancy landscaping, it doesn’t automatically increase the property’s value to $600,000. If similar properties in your neighbourhood are selling for a maximum of $525,000, your eye-popping improvements are unlikely to increase the selling price beyond this – meaning you have overcapitalised.
Increase the value of your property without overcapitalising
While overcapitalising is never a good idea, there’s no question that the right renovations can significantly add value to a property. Some areas where home improvements can make a big difference include:
- new curtains or blinds
- a fresh coat of paint inside and out
- updating light fittings with modern fixtures
- renovating an old kitchen or bathroom
- refinishing floors and replacing carpets
- adding a carport or garage.
When it comes to renovations, the key is to increase the kerb appeal without exceeding your budget. Consider your neighbourhood and the types of features that buyers or renters are likely to be looking for, and be willing to set your personal preferences aside. While you may enjoy having a beautifully landscaped yard or pool, the next person living in the house may not. In other words, it pays to be practical.
A good rule of thumb
In general terms, you’ll probably avoid overcapitalising if you keep the cost of your renovations to less than 10% of the value of your home. The less you need to invest in your home to give it that wow factor, the more you can expect to get back when it’s time to sell. And always keep a close eye on the sale price of similar properties in your area.
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.
Why should overcapitalisation be avoided?
While many renovations increase the value of your home, there is an upper limit on what properties are worth at any given time. If you find yourself in a situation where you have to sell an overcapitalised property on short notice, you could find yourself losing out on your investment.
If you are considering home improvements and would like some advice on how it will effect the value of your home, then call Professionals Clyde Poulton Real Estate on 4421 2644.