To overcapitalise a property means to overestimate the market value of a property, or to put more funds and assets into the property than what you will get back in return from a sale.
Whether you intend to live in your property, rent it out or sell it you will need to keep the threat of overcapitalising in the back of your mind. You can overcapitalise at any stage; from the moment you start looking to purchase property through to putting the finishing touches on your renovations.
Here are the most common ways you can overcapitalise on your property:
Not understanding the market
Knowledge is power, and there is no exception to that rule when it comes to purchasing property. Don’t rush into it, take your time to look at homes on the market and watch what they are selling for. Once you have a solid understanding of the market value of the area you are buying in, you will be far less likely to buy something at a price that is too high. If you are looking to buy a place with the intention of renovating, be careful what you take on. Look for the ‘easy wins’, such as a bushy, overgrown yard that will be immediately improved with a simple clean out. If the fix up is as easy as hiring skip bins in Melbourne for the weekend and clearing the place out then you should be in a good position to do this for hardly any cost, while at the same time adding value to the land.
If you are planning to do renovations to a property you already own or live in, have the home evaluated by a professional before you start. Overcapitalising means spending more on the home than what you could earn back in a sale, so to find this budget you first need to know what your home is currently worth. You should be able to get an indication from the local real estate agents what homes are worth in your area, and this will help you with setting a budget for your renovation.
Not sticking to a budget
Once you have a budget in mind, stick to it. It is so easy to go over budget by doing extra little bits here and there. But don’t be fooled, those extra bits really add up over time. Not having a clear budget in mind before you start is even worse, as you risk getting halfway through the renovation before realising you have run out of money. And then you are left with a half renovated house and no funds to continue.
Not choosing the right things to renovate
If you only have a definite amount of money to spend, you need to choose wisely on what to renovate. Certain areas of the home will give you more return on investment than others. For example, installing a swimming pool but leaving your old kitchen or bathroom untouched wouldn’t be the best use of your funds. Swimming pools are not guaranteed to bring more money to a sale, as not all buyers want one. But a nicely done kitchen or bathroom will add value immediately.
Not thinking of the outdoors
Australians love outdoor living. In fact, of all renovations that are currently being planned, over 15 per cent of homeowners are planning on updating the outdoor entertaining area before doing anything else. Landscaping adds enormous value to a home, with sale prices being as much as 11 per cent higher for homes that have had landscaping. You can hire a professional to really make the most of your outdoor area, or you can try DIY by hiring a skip bin and clearing the shrub. Don’t forget to take care of the front yard and all the way to the front door, as first impressions are very important in a home.
This problem is so common, and it is easy to see how it happens. When you are getting quotes for any building work or materials, go through the line items with a fine tooth comb. See if your tradesmen will give you a list of exclusions as well as inclusions, so that you aren’t surprised when costs arise throughout the job. It is also wise to add about 20 per cent buffer to any quote you receive, to account for unavoidable extras that you will come across.
Not knowing the final outcome
When you are first sitting down to work out your renovation budget, you need to have already decided what it is you are going to do with this home. Are you renovating with the intention of; living in it, selling it or renting it out? Because all three options require very different renovations. If you are planning on living in your home for the next ten years, you can go a little above the cost of return on investment as you’ll make the money back slowly over the next ten years while you are living there. If you plan to sell, you need to be careful not to over invest in your renovations as you’ll want to get the highest profit possible and anything you do with renovations will eat into those profits. And renovating to rent out means you need to think long term about having people coming and going from the home. Choose durable materials that will last a long time and through some serious wear and tear, or you’ll just end up having to replace things too often and the final costs will blow out over time.