How to avoid over-capitalising

Put simply, over-capitalising is when the cost of renovations outweighs how much value it will add to a property. 

There are plenty of ways to avoid over-capitalising.

Start with a valuation

So you know exactly what you are working with, your first step should be to get your property valued by a professional. The value of your home may have changed since you purchased it and it is helpful to get an independent view regarding its value.

You should also look at the values of houses in your area. Do research on websites like www.realestate.com.au to see recent sales and median sales prices for your area. There is no point spending a small fortune renovating your home if it’s located in an area where home seekers are unwilling to pay a higher price.

Think about how long you want to stay

This is a key consideration because time can have a big impact on property prices. If you plan on staying for more than 5 years you may be able to spend more than if you were looking for a quick turn-around.   If you are in a property growth area then the capital gain over the medium to long-term could eclipse your renovation costs.

However, if you are looking to “flip” a house by buying a fixer-upper and selling it for a quick profit you will need to be clever about your renovating project.

Use your head and not heart

Lifestyle is the main reason most of us renovate and that’s where renovations can go sideways. It can be easy to get personally attached to the changes you plan to make. Of course it’s important to have a comfortable home for you and your family but think about which renovations make the most financial sense and will appeal to a wide range of people.

It might make total sense for you to remodel the kitchen but do you really need the most expensive bench tops and appliances? It all depends on who is likely to buy your house. What are the demographics of your area? Are people moving in likely to appreciate the top-of-the range gas cooktop?

Remember the property cost does not equal property value, which is determined by how much someone is prepared to pay.

Expert tradies versus Do-It-Yourself

There are loads of jobs you can do yourself. Pulling up carpet, painting, and landscaping are all things you could assist with. The trick is realizing what you have time for.  It might actually cost you less to simply pay a professional rather than have a job drag out over weeks as you attempt to do it yourself.

You may also think that you will save money by taking on the renovating project yourself but you need to consider the risks of this option.

Almost 1300 men are hospitalised each year across Australia due to ladder injuries alone. [1]

You could quickly drain your funds if you are injured and are required to take extended time off work. Some jobs are best left to the experts, rather than calling in a qualified tradesperson after the event to fix up the mess.

Be smart to boost your property value

Renovations should be strategic so that the changes suit your lifestyle now but will also appeal to the next buyer.

Renovations that can add real value to your home:

• A user-friendly kitchen with plenty of bench space and cupboards.

• An extra bathroom or ensuite.

• Landscaping with a front and back garden that are tidy and easy to maintain.

• Outdoor living areas that provide alfresco entertaining are always popular and low maintenance gardens.

• Fresh paint.

• An extra bedroom.

• Undercover parking.

• A separate area for kids such as a playroom or rumpus if you want your house to appeal to families.

Before you start knocking down any walls your renovations, be sure to understand all the costs and risks associated with your renovation project.