By Tricia Williams, Manager – Edney Ryan Mortgage & Finance
Renovating your home or investment property can be a wonderful way to make it more appealing to buyers and increase its overall value. However, there’s a fine line between spending money to make your property more appealing and overcapitalising on your renovations.
In this article, we look at overcapitalising. We discuss what it is and explore ways to avoid it while still increasing your property’s value.
What is overcapitalisation?
Overcapitalisation occurs when the money spent on a renovation exceeds the value it adds to the property. For example; a homeowner’s house is valued at $600,000. They spend $200,000 on home renovations, with the hope of increasing its value before sale. The new valuation reveals the house is now worth $700,000 – meaning the homeowners have overcapitalised by $100,000.
How can overcapitalisation affect your investment?
When you overcapitalise on your home, you run the risk of being unable to recoup the money spent when it comes time to sell.
How to avoid overcapitalising
The following outlines some of the ways you can minimise the risk of overcapitalisation.
- Avoid spending too much: As a rule, try to keep the cost of cosmetic renovations to less than 10 percent of your home’s value. For more structural renovations, this can increase to 40 percent of the value. It is important you look for improvements that work within this budget such as:
- Renovating the kitchen or bathroom
- Adding fixtures such as window furnishings and light fittings
- Painting walls and replacing old carpets
- Seek expert advice: Ensure you have the most relevant and up-to-date information on your property by seeking the advice of experts. Speak with professional valuers, local estate agents, mortgage brokers and financial advisers to discuss your home or investment. Do your own research by keeping an eye on comparable properties selling in your neighbourhood as this will provide a better understanding of what buyers look for.
What to do if you have overcapitalised
If you have no plans to sell your home soon, there is a good chance the overcapitalisation will be offset by the long-term growth in the property’s price. If you are in no hurry, then simply sit tight. There is no doubt smart renovating is a good way to unlock value in your property. Just remember to renovate with your head and not with your heart.
If you have any queries about your home value, obtaining finance for renovations or your current home loan rate, please give me a call on (02) 9908 9888.
Patricia Williams is a credited representative (CRN 400458) of BLSSA Pty Ltd (Australian Credit License No. 391237).