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Over – Capitalising, and how not to do it

25.09.20 | Marc Barlow | Blog

During these months of COVID-19, with more people working from home and social engagements curtailed by state and federal government restrictions, people have been spending more time at home.

Walking the streets, you’ve probably seen it: fences being painted, gardens being landscaped, decks being stained and even the occasional full-scale renovation or rebuild. You may have even got into this DIY home improvement binge yourself. The carpark at Bunnings doesn’t lie: people are fixing up their properties.

Replacing a dodgy hinge is one thing, but when does home improvement slide across into overcaptilisation?

Overcapitalisation explained

So what is overcapitalisation, and how do you avoid it?

In every street in every suburb or town across Australia, there’s a limit to what people will pay for a property. An identical property will sell for more in a fancy inner-city suburb than in a remote community. Understanding what the upper limit is for different property types in different locations is the key to understanding – and avoiding – overcapitalisation.

Let’s use an example: imagine you live a free-standing, three-bedroom house in a pretty north shore suburb in Sydney. It’s in reasonable condition, but the kitchen and bathrooms could use some work and it needs a fresh paint job, new carpets, curtains and more. Also, the back yard is a mess.

Your plan for a renovation is an estimated $200,000. Doing no work at all, you think you’d sell for $1.5 million.

How do you avoid overcapitalising? Look at recent comparable sales. Are similar renovated places selling for $1.7 or more? You will overcapitalise if you spend more on property improvements than the additional value they’ll add to the house. Just by spending more on a property doesn’t mean you’ll necessarily increase the value of the property by the same amount.


Properties that are more than they’re worth

The old saying goes that if you’re a renovator, you want to buy the worst house in the best street. The opportunity then exists to get a bargain and increase its value to match comparable houses.

On the other hand, buying the nicest house in the street might be ok too – somebody has to own it  – but you don’t want it to be too much nicer than your neighbours, or you reduce the return you’ll get if need to sell at some stage.

If you never plan to sell, overcapitalisation might not be a big issue. Dig out that cellar and put in an entertainment complex. Might as well enjoy it if you’re there for the long haul!


Ways to avoid overcapitalisation

For most people, though, our home’s value is an important consideration for the future. If this sounds like you, maintaining the value of your property is more important than over-reaching and creating a gold-plated chateau in the suburbs.

On the other hand, just letting your house date and decline in quality means that if you need to sell, you may have actually undercapitalised.

Spend time and money on the areas of the property that age the fastest. A bedroom is a bedroom. But the difference between a new kitchen and an old one is easily noticeable. As with bathrooms, small improvements can make a big difference.

For those looking to sell, a modern kitchen, bathroom and laundry will add to your property’s value. And you can also get a considerable ‘wow factor’ by simply updating curtains, blinds and light fittings. A new coat of paint helps too, especially in bright living areas.

Also, don’t discount ‘curb appeal’. First impressions count. Make the front yard look neat and well-tended.

Contact us

Our experienced experts at Mortgage Broker Group can give you market insights regarding recent sales in the locations you’re looking to buy (or sell) in. Get a better sense of what you’d need to spend to maintain market value. And once it’s time to hit the market, we’ll be there to help with loans and paperwork.

Talk to us today.