Making renovations to your property can be a great way to increase its market value. That said, upgrades don't always do this – over-capitalising your property is a real risk that you need to be aware of.
What is over-capitalising?
Over-capitalisation occurs when a dollar spent on renovations translates to less than a dollar of increased home value. While it's intuitive to think improvements will always increase the value of your home by the amount you put into them, this isn't always the case. Spending $50,000 on renovations for your property's value to increase only by $25,000 is not a great investment.
How can you avoid over-capitalising?
Over-capitalising is easy enough to avoid if you're thoughtful with your renovations and budgeting.
1. Budget in terms of the existing value of your home
Setting your renovation budget as a percentage of the value of your home is a good way to minimise the risk of over-capitalising. For example, a common rule of thumb is to spend around two per cent of your home's value on a kitchen renovation. A $50,000 kitchen in a $500,000 home doesn't make much sense, but it would in a $2.5 million one. It's all about keeping renovations in line with the expectations a buyer might have for a property of that value.
An appraisal from a real estate agent can inform you of what your home is worth, making it easier to create a renovations budget. The agent may also have suggestions as to what improvements would make most sense for your home.
2. Consider the geographical area you're in
Building an extra guest bedroom, pool and five-car garage won't necessarily add value if your property is in a neighbourhood where most houses are small two-bedroom flats. Most neighbourhoods have ceiling values above which a property will struggle to climb – your home can be best in the area, but too far above the rest and you'll struggle to re-coup your renovation investment.
3. Fix things first
When considering renovations, the best place to start is always with fixing those things that are broken. Damaged property can detract from a home's value, so invest in fixing these first for the best return.
If you're thinking of selling your renovated home, get in touch with the team at Brad Teal to learn more about how we can help.