Renovate for profit and avoid overcapitalisation
15 November 2018
A home is more than four walls and a roof. It’s your castle, right? Or at least it will be once you add the new extension out the back, remodel the bathroom, oh, and build that handy moat. If you’re thinking about renovating, it’s worth thinking about what actual value you’re adding to your home with the choices you make. Because while your castle might be worth the world to you, you might find it’s a very different story when it comes time to sell.
Let’s take a look at what’s actually likely to add value to your property, so you can avoid the risk of overcapitalisation.
What adds value? How to increase property value.
There’s no doubt that renovating can be a good way to add value to your property – whether you’re looking to sell now or down the track, or would just like to increase its rental value. While there’s no magic bullet, there are a few things that are generally looked at as adding value to property when done well. These are the things that buyers value, can help increase your rental income for an investment property, and improve your valuation.
- Bathroom renovations – both updating and adding an extra bathroom can help add value.
- Kitchen renovations – modern kitchens present well and can help improve the livability of a home.
- Environment-friendly updates – not just a feel good measure, improvements that actually help buyers save money, like insulation and solar panels, are generally valued.
Causes of overcapitalisation, and what to avoid
Overcapitalisation is caused by spending money improving your home that doesn’t improve the value of your home by the same amount. Don’t get caught out on spending money on work that neither potential buyers nor a lender appraising your home are going to value. Some common traps:
- Adding a swimming pool – yes, they’re nice on a hot summer’s day and can make a lovely feature in the backyard. But they’re very expensive, making their cost unlikely to be covered by an increased sale price. And some buyers actually shy away from a pool as they’re an ongoing cost.
- Turning your garage into a den – extra room is great, but buyers also value room for their cars. So although you might be adding some extra living area, you’re taking away a car space.
- Overly expensive fittings and fixtures – while buyers value quality, be sure that your chosen fittings and fixtures match the overall budget and aesthetic of your home. Spending thousands on a top of the line oven in an old and tired kitchen isn’t likely to do much for your value.
- Passing trends – will your renovation stand the test of time? While modernising your home is often worthwhile, be careful not to incorporate too many hot trends as by tomorrow you might find market tastes have changed.
- Losing the original charm – some homes are valued for their character. If your renovation takes away from this charm rather than complements it, you might find you’ve devalued your original home.
- Wrong location – be mindful of what the market around you is doing. After renovating, how much will you need to sell your home for to make a profit? Are there any homes in your area selling for that? If not, the interest in your area might not support it.
Setting your budget
To help avoid overcapitalisation, it’s important to get a good handle on your finances and be clear about your renovation goals.
If you’re planning simple cosmetic changes, the costs will be more straightforward. If you’re considering any construction, make sure you factor in not just the building costs, but also associated costs like council approvals and building inspections. Make sure you also factor in a healthy buffer for unexpected costs and budget overruns. If you’re looking to keep the costs down, thinking about what DIY options you have.
Talk to us about our loan options and get a loan that’s right for you to help you with your home renovations. Enquire Now.