Don’t Over Capitalise
31 July 2018
What is over capitalisation? – Basically, its when the cost of building/renovation of a property does not add the value that it costs to put there.
Improvements depreciate over time, and it’s usually the increasing land value that significantly raises the value of the property. Improvements will also increase in value but only relative to the cost of building them, and the market demand in that location.
Cost vs Value benefit - If you are looking at building or extending on a property, it is important that you match the build budget against the current value of the house and with the final value of the house after the work has been done.
Don’t assume that for every dollar you spend you will see that value increase in the property. Obtain the value of the property before and after value so you know, not think you know, how much value increase you should expect to receive.
Consider the Suburb - Every Suburb has a price ceiling that can be difficult to break through, and its understanding that price level, before you spend your money, that can save you a lot heart ache and money in the future.
Understand your strategy, will the renovations actually increase the return on your investment. Every rental market will have a sweet spot where there is most demand for a particular style of property and thus vacancies stay low. If you renovate will be you pricing yourself out of this main market? thus opening yourself up to greater chance of vacancies?
Stick to the Budget – The best value increase is not always to add more space, you can get often get better “bang for your buck” by simple cosmetic upgrades, like paint and carpet. Big ticket items like bathrooms and kitchen, can be modernised without having a complete refit.
Think to the Future – Good renovation should last the test of time. Avoid fades in decor and design, or anything that is too personal, also consider how a home will look in 20 years’ time, and what might be attractive features, like efficient water and electricity usage, solar passive design and functional floor plans.
