How to avoid overcapitalising on your investment property
- Posted in Managing a Loan
Australians love renovating. We devour reality television shows and magazine spreads of lush interiors, and we make surplus trips to DIY shopping barns. However, when it comes to renovating our own property it's vital to avoid overcapitalising.
Whether it’s doing up an investment property or a house you’re getting ready to sell, making improvements that exceed the value of the property is referred to as overcapitalisation - and it’s a rookie error that you can avoid. Armed with the right research, you can make improvements to your property that can both maximise rental return as well as increase your property’s resale value. Budgeting is key to ensure you don't spend more than what your property is worth.
Research, research, research
Start by establishing an accurate value of your property. A reputable real estate agent will be able to help. Next, research recent sales in your area to find out exactly what comparable properties are selling for - those that are renovated and those that are not. This will give you a picture of the pricing disparity in your area. For example, if your property is valued at $300,000 and similar renovated properties are selling for around $450,000, this would suggest that spending more than $150,000 on your renovation could lead to overcapitalisation.
Getting bang for your buck
Continue your research by finding out what types of features buyers are looking for and which types of properties are attracting a premium return. Is your property in a neighbourhood predominantly of families? If so, upgrading the kitchen or adding a second bathroom is likely to be more sought after than a high-tech wine cellar or four-car garage.
Think about what will create a lasting impression on buyers. Quality floor coverings, neutral yet stylish kitchens and bathrooms are classic favourites. While big wow factors can help sell a home, also weigh up the costs from that impact. Is it worth spending the money to renovate the whole bathroom or should you just update some of the fittings? Thinking pragmatically about the renovations and the returns you can expect can help you stay within budget.
Property prices may be high now, but it’s always best to think conservatively when setting a budget because the market can change. Speak to friends and family who have renovated and get a clear picture of costs. Don’t forget to factor in the odd unexpected expense such as repairing a blocked drain. Think about setting up an emergency budget so you can better manage the unexpected. If it is an investment property, the building may be untenanted while you work on your improvements, so you may not be receiving any rental income.
If your research stacks up and you’re ready to start improvements to your investment property, you will need to consider the most effective way to finance your renovation project. If you need to borrow funds, it might be a good time to look at refinancing your current home or investment loan. Get up to speed on refinancing with Pepper.
Smart renovating is one way you can unlock value in your property, just remember to renovate with your head, not your heart.