How to avoid over-capitalising in a booming market

11 Oct 2021

When a property market is surging, the question of how you avoid over-capitalising carries even more potency.

Melbourne’s property values are up 15.6 percent for the year to date and a sustained boom is predicted to deliver up to 10 percent growth in 2022.

So, for homeowners looking to sell and investors scouting for a ‘renovators dream’ they can flip for a quick profit, it’s vital to understand to what extent you can enrich a property’s value, but avoid over-capitalising.

In basic terms, overcapitalising describes a process where the money spent on a purchasing and improving a property, is more than the property’s resale value. In other words, the costs spent at the time of purchase, or on renovations, is not able to be recouped when the property is sold.

So how do you know how much to spend on your property before listing, or on renovating a recent purchase? Here’s some top tips to help you avoid over-capitalising.

 

 Remember who the renovation is for

Is it a purely business proposition where the whole point is to improve the property, take the money and move on? Or is this a home where you plan to stay for a length of time? It does make a difference impacting everything from where you buy, to how much you should spend on a bathroom vanity.

 

Talk with your agent about your expectations, and their insights into the market

Plug into the knowledge of a real estate agent, they know more about yield and price movements in your suburb than anyone else, plus they know who’s buying into the area and that makes a big difference in renovating to sell.

 

Can simply holding the property net you a profit without raising a hammer?

Do some honest maths. If you buy a property for $750,000, then spend a year and $75,000 on the renovation and sell it for $850,00 you might say hooray! But, there may be a chance that property appreciation rates in the area mean you could have got that price without spending anywhere near that on the renovation. Again, talk with your agent.

 

Make a budget and stick to it, no matter how tempting

As a rule, kitchens and bathrooms sell homes but that doesn’t mean you have to go nuts. Experts suggest two per cent of the house purchase value should be allocated to each of these areas. This gets tricky if you have four bathrooms – but hey, you have to start somewhere.

 

Easy traps to avoid in capitalisation – both over and under

If the area is trending into a more affluent demographic, (again your agent will know who is looking and what they’re willing to pay) incoming buyers may expect an Oliveri, gun metal grey, double bowl sink in the new kitchen. Your perfectly lovely stainless-steel number could be perceived as cheap and then suddenly the prospective buyer is costing in a must-do kitchen renovation.

Buyers in the more moderate belt could also walk away if you are expecting them to pay for top of the range accessories. It is ridiculously easy to overspend on a kitchen and not win back the cost.

But, if the area is a lower-range market attracting first-home buyers and investors, then accessories such great laminate benchtops rather than imported stone, may realise a better return.

 

Do not bite off more than you need to

A major renovation that sees you adding on rooms or extending the house, should not, as a guide, exceed 10 percent of the original purchase price. It’s also important to consider the domino effect of a renovation that may uncover other problems, be it structural or aesthetic. Comprehensive advice from a builder and your local real estate agent will help set your budget and outline the profits you can expect before you start the project.

 

Shop around for good tradies unless you’re a true pro

Do not attempt to do the work yourself, beyond the simplest tasks. It is not worth the stress and will not save you money if the end result doesn’t stand up to buyer scrutiny.

 

On the other hand …

The general wisdom behind maximising the value of property, is to hold it for at least ten years. So, if you are considering renovating the home that you intend to live in and enjoy for at least the next decade, a renovation takes on a different light. It’s still wise to talk to local agents about the prospects for your suburb, but buying your dream kitchen fittings, for example, can be justified.

Whether you are considering buying or selling property this spring, the Woodards team is available to help you reach your property goals.  Contact us today.


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