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The Dangers of Overcapitalising



In a buoyant property market, as in most Australian capitals over the past year, it’s tempting to spend on home improvements and renovations. After all, prices on the up mean money laid out now would be recouped, and then some, if the property was sold – don’t they?

But that can be a trap. Overcapitalising – spending money which would not be recouped by an increase in a property’s value – is a risk for both investors and owner occupiers. While most experienced investors are wary about overspending and wise to avoid this trap, that’s not always so for newcomers to the investment market, or when improving on our own homes.

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Creating Your Own “Home Sweet Home”
We all want our homes to be comfortable and convenient; if not the home of our dreams then at least one we like, decorated to our taste. And who hasn’t dreamed of a pool and air-conditioning on a hot summer’s day, an extra bedroom or two when the relatives arrive or sipping wine in a landscaped garden with water feature.

While some of us buy as a way of moving up the property ladder – add value, sell, take another step up – many of us go through the exhausting and stressful process of house hunting with hopes of staying put for many years.

Such plans bring with them the risk of overspending – adding top-quality fixtures, and features such as pools, which take the amount spent on the home well beyond what it would fetch if sold. The rationale: we are not moving anytime soon.

But we never know what the future will hold and unexpected events may force us to sell. Bereavement, divorce, a work transfer, an overseas opportunity – these are just some of the reasons that “forever” home may turn into a stopover. So it is always wise to ensure your home is not overcapitalised. That means being sure changes and improvements will boost the property’s value to cover their cost and hopefully, make a profit.

Know What It’s Worth

So how to know that? You know what you paid for your home, but do you know what it’s actually worth? A good starting point is to compare your property’s worth to the local median price to be sure you do not put your home out of the reach of buyers looking in the area.

Even it’s far superior to others in the area, if it is well above the suburb’s median price buyers looking in that area may be put off and it may take longer to sell.

After all, if you are creating a million-dollar house in a half million dollar area, even if it is worth it the pool of buyers is likely to be small. If your house is not in a great location – beside the railway line or on a main road, for instance – that is something no amount of spending will change. And the work you plan may destroy features buyers in that area want – reducing the garden size with an extension, for example.

So if you are contemplating renovations – perhaps kitchen and bathroom, expensive landscaping, decking or even layout changes and removing walls – it’s important to know how much your property is worth and what it would be worth with that work completed.

Ask the Experts

Consulting a real estate agent is a great way to find out whether your plan is a good one. Seek an appraisal of your home and the agent will compare it to others recently sold in the area, as well as assessing its own special features and drawbacks.

Ask the agent for advice about your plans – would they be a wise move, would you get that money back if you sold? If the answer is no, the time, stress and cost of renovating are best avoided.

adviceAuthor: The Chief Executive Officer of realestateVIEW.com.au, Enzo Raimondo is an authoritative source of information for the Victorian property market and is now the vision of the industry owned real estate listing portal – realestateVIEW.com.au

 

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