How To Avoid Overcapitalising
Building a new home is extremely exciting. It can be tempting to go with trends that will not just blow your mind but perhaps your budget as well. The same applies if you are planning to renovate your house. It is easy to get carried away and go all out when it comes to spending money for a new deck or bigger kitchen, for instance.
While these additions can increase the value of the property and even your enjoyment of it, you could end up spending more than you should. Before the building or renovating process, you surely have a budget that you want to stick to. Unfortunately, overcapitalising is not always an easy thing to avoid.
What Exactly is Overcapitalising?
The answer may vary depending on the context in which you ask the question. For business people, overcapitalisation is when a certain company has more debt than the value of assets. When the market value of a company is no longer as much or at least equal as the total capitalised value of the business, it is deemed as overcapitalisation.
On the other hand, if you ask an investor, overcapitalising means renovating a property without adding value to it. This concept applies to new homeowners. Most of the time, those who just purchased a house naturally want to beautify the rooms and the entire place.
Investors typically have the same plan. They find ways that will allow them to add value to their portfolio. It is why they would renovate their kitchen or even build a backyard patio. These renovations are also some of the areas a new homeowner would look to change.
A wise homeowner should concentrate their efforts on methods that will help improve the property and increase its value over time. Many new homeowners – and even older ones – believe that they will benefit from a renovation. In reality, not all renovations are helpful, especially if the goal is to add value to the property.
Avoiding overcapitalisation as a new homeowner sounds simple. You should be selective when it comes to the renovations you choose to perform. You mustn’t go into these renovations with the belief that the investment now will help you sell it faster later. This is textbook overcapitalisation.
When the overall cost of a renovation outweighs the value it adds to your home overcapitalisation occurs on your investment. Additionally, this takes place when renovations are performed that a potential buyer does not see as value-adding.
For instance, you have an investment property worth $800,000. You then spend $100,000 to renovate the kitchen. Does it mean that your house is now equivalent to $900,000? Unfortunately, it is not always the case.
If there happens to be a similar property available for $800,000, your property would have to be worth the extra $100,000 to the buyer. They may choose to improve the alternative property in their style, with the extra money they have saved.
Why Should You Avoid Overcapitalisation?
Before you learn about a few ways that will help you avoid overcapitalisation, it is helpful to understand the “why” behind it. Aussies are known for their love of spending money on their homes. Renovations are fun and exciting.
However, they also involve money, and most of that may not return if you do not choose the right renovation project.
It is not always easy to say what type of upgrade will improve your home’s value. There is one helpful method though. The first step always involves paying close attention to the value of your home and those that are around you.
Let us say that the homes in your suburb are valued at $500,000 max. Your home, on the other hand, is already worth $480,000. You will not earn money if the renovation will cost you more than $25,000. You do not want to break even either. Before you go ahead and plan your renovations, always check the market first against the current value of your home.
According to experts, some of the best upgrades that you can do to your property for the greatest return on investment are the following:
- Renovating your kitchen and bathroom
A report claimed that most millennials are compromising on the size and conditions of their first home. Many would rather buy an old house that requires repairs, making the purchase more affordable in the long term. Along with these details, the report also stated that bathrooms and kitchens are the most important parts of the house for these individuals.
Kitchens offer bigger returns on investment, but it does not mean you have to go big when upgrading them. Just by replacing old appliances and ensuring they match the décor would be enough to increase the home’s value.
As for bathrooms, a complete renovation is not necessary. The upgrade does not have to be expensive as well. You can simply improve certain elements, such as vanities and fixtures.
- Taking care of curb appeal
The best way to improve curb appeal is by landscaping. It is not only easy but affordable as well. Even new homeowners can afford it. Having healthy trees and blooming flowers can indeed increase how your property looks on the outside. As a result, your home’s value increases.
- Modifying the floor plan
You do not have to stick to the floor plan that you were given when you purchased the house. You can completely change it. For instance, if you love a more open design, you can remove a few walls, which can help increase the value of your home after the first year.
Adding more space into the property, such as through a second bathroom or family room, can also improve the home’s value. If you can transform the house into something bigger, its value will become larger as well.
There are many other ways to improve your existing property value. To know if the upgrade is worth it, you can compare the cost of the project with the overall value. Analyse how much you will pay for different upgrades, along with how much you expect to recoup once you sell the house.
What You Can Do to Avoid Overcapitalisation?
Whether you are a new homeowner or an investor, overcapitalisation is not something that you would want to hear about. Imagine that you have a low set house situated in a modest suburb. Then, think of this property with a marble pool. There are fountains and a sauna as well. It is just one example of a case of overcapitalisation.
When you overcapitalise on a property, it can cause not just heartache but debt as well. It is why it is understandable that you may want to know how to avoid such an occurrence.
Overcapitalising makes it difficult for you to get a return on investment, which is essential in case you plan to sell your property in the future.
This pitfall is common not just in Australia but around the world. It usually happens to those who are building a property or those who are renovating. Although it is difficult to avoid it, there are steps that you can take to make sure that you stop yourself from overcapitalising on a property. Here they are:
- Be Wise.
Renovating can make your house more attractive. A bonus is that it becomes a more comfortable place to live. If you ever intend to sell it, renovating your home can make it more valuable than ever. Unfortunately, Australians struggle when it comes to improving their home’s value.
No matter what you plan to use your home for, whether you will live in it, rent it out, or sell it to a buyer, your house should be seen as a form of investment. Properties do not come cheap, which is why you should maximise your investment as much as possible.
While renovations can improve the overall appearance of your home, they may not always be helpful if your end goal is to increase the property’s value. The right renovations will not only transform your drab house into a property that is considered cash flow positive; they should also increase your chances of selling the property more than the amount you bought it for.
Research has shown that Australians are fully aware of how valuable renovations can be. A report showed that more than 40% of mortgage holders were already planning on doing a home renovation when they were surveyed.
Renovations can potentially improve your home’s value. However, the survey results did show that many Australians only wish to improve their lifestyle. They turn to the job of customising their homes instead of the quality of living.
The same survey also gave these details:
- 15% of Australians who wish to renovate would like to update their outdoor entertainment areas before others.
- 28% of the respondents said that they would like to upgrade their kitchens over anything else.
- 27% of the surveyed mortgage holders said that they would update their bathrooms first.
There is a fine line between making your home more appealing and desirable and property overcapitalisation. When you choose your renovations wisely, you can avoid this problem.
- Get a professional property valuation.
One of the most crucial steps towards determining whether or not you are overcapitalising is to know exactly how much your property is valued at. You cannot guess the number, which is why you should hire a professional to do it for you.
The value of your property is not the same as the amount of money you spent when you purchased it. Most of the time, the value changes quickly. It is why professional valuation is a must. You can factor in the change while getting an independent view of the matter.
Once you know the accurate value of your home, you can then decide on the amount of money you are willing to spend for renovation. You do not want to spend a lot of cash in renovating a property that has low value. For some homeowners, this concept may make sense. After all, they will live in the house. Their goal is to simply live in a comfortable place.
However, there is no way for you to tell whether or not you will stay there for the rest of your life. Therefore, it makes sense that you still consider its value whenever you intend to renovate.
- Examine your suburb.
As mentioned earlier, you should consider the homes that surround your property. Take into account their current value, which you will know with a little bit of research. Chances are there are homes up for sale in your area. Neighbourhoods will typically have a ceiling value, which is a threshold that buyers (or renters) are willing to spend to move into a certain property.
Your goal right now may not be to attract homebuyers or even tenants. After all, you just acquired your home. However, you should already start spending your money wisely. The best way to do it is to know the things that will push the value of your home upwards.
Meanwhile, there are some areas where people may not be willing to pay a higher price. If you are in an area where buyers have a low limit on the amount they want to shell out for a home, it is best to stick to cheap upgrades. After all, potential buyers will not pay for a starter home if they already have their eye on a luxury mansion.
- Have a budget.
The next step now is to formulate a budget. At the start of the renovation process, you should create a budget; otherwise, not having a solid dollar value in mind will only lead you to overspend. To avoid overcapitalisation means that you should avoid overspending, especially over unnecessary upgrades. Limit your list of renovation projects, which will get you to keep to your budget.
Also, when you know how much you should spend, it will become easy for you to get your finances in order. This way, you do not get strayed as you begin building because it will all fit your budget.
- Renovations should not be personal.
This rule is easy to say but hard to commit to. After all, you are renovating a place where you live. You can quickly get personally attached to it, particularly with the modifications that you make. As with any other homeowner, your goal is to make your home as well-made and comfy as possible for you and your family.
However, you should still think about which renovations truly make the most financial sense. Although you may not plan to sell your house anytime soon, your upgrades should still appeal to different people. You can never know what the future holds. It is always possible that you will change your mind and find another property where you would want to live.
For instance, you may think that adding a swimming pool now would make your home more enjoyable, especially for the whole family. While pools are fun, they can outweigh the value that they bring in to your property. Additionally, they may even push homebuyers away, specifically those who believe owning a pool means there is heavy upkeep required.
In the end, you should be smart in choosing the renovations project. You should not just consider yourself and what is now but also other people and the future.
- Be strategic.
When selecting from renovations choices, keep in mind that you should only choose those that will give your home the most value possible. For most people, it means upgrading bathrooms and kitchens. These two perennial favourites are popular for several reasons and one of them is that they truly work. Having a functional bathroom or a well-designed kitchen can certainly improve the look and value of your home.
In the last year or so, many renovations are focusing on making their homes greener. Even those who have just moved in would like to turn their property into something that would benefit the environment. Australia is gaining momentum in installing solar systems, which not only reduce energy bills but are also environment-friendly.
While the mentioned renovations help improve the home value, some renovations may be a bad idea for future renters or buyers. An example is transforming an extra room into a library. It may have huge bookshelves and even beautiful lighting.
However, after you have customised the space, its structure will become different. The future homeowners would either be forced to embark on a new renovation project or share your interests in reading.
Is It Possible to Avoid Overcapitalisation?
The simple answer is “yes.” You can increase your home’s value without needing to overspend. Aside from taking the tips above, you may also want to focus on simple modifications, such as replacing old curtains with new ones, updating the fixtures, and applying a fresh coat of paint inside and outside the house.
