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How To Avoid Overcapitalising On Home Renovations
●July 28, 2021●4 minute read
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Being one of the most common sins in real estate, overcapitalising on home renovations is a trap that many homeowners are duped by. The tall order can blow out your costs, which might leave your house dwindling on the market for months. Often, it’s not hard to spot a house that’s fallen victim to excessive renovations, especially when compared to a neighbourhood that it just doesn’t fit into.
If your goal is to create a cutting-edge home that appeals to a wide array of potential buyers, overcapitalisation is something you might want to avoid. In this guide, we discuss some easy ways to avoid overcapitalising when renovating a property.
What is overcapitalising?
Think spending thousands of dollars on a swimming pool in a neighbourhood that finds them too high-maintenance, adding an outdoor entertainment area that’s out of sight and out of mind, or installing overpriced fixtures when the bathroom has structural issues.
Overcapitalisation simply means improving a property beyond its resale value. In other words, you’ve spent too much money on renovation projects, and you won’t be able to recover the costs once you sell the property.
However, there are ways that this money pit can be avoided if you take the time to properly plan your dream home renovations.
1. Know your worth
Your first course of action should be to get your home properly valued by a qualified real estate agent. A property valuation will be the birthing ground for your new home and should determine the amount of money you spend on renovations. According to Mortgage House, a general rule of thumb is that your ideal renovation budget is about 5 to 10% of your home’s value.
It’s also important to assess how much your property has changed in value since you purchased it and what other houses are being sold for in your neighborhood. Understanding your property’s worth will give you a clear idea on how much your budget should be and what type of improvements you can consider doing without going overboard.
2. Scope out the area
In addition to knowing the worth of your property, it’s also important to consider the surrounding area. Neighbourhoods will generally have a ceiling value, which means there is a threshold buyers are willing to pay for a property in the area. That is why you should do your homework to confirm whether the location you are buying in is ripe enough to return fruit.
Understanding the pricing disparity in your neighbourhood, including the highest and lowest range, will help you determine what style of houses go for what kind of money. Not all homes are potential gold mines, so check median prices in the neighbourhood and find out what similar properties are asking for.
Another reason to borrow your neighbour’s lawn mower is to take note of any features they’ve added to their house. By visiting open houses in your area, you can compare improvements they have made, such as quality of fittings, the amount of space available, and interior condition. Taking these observations into account and looking at the value of the properties around you will give you an idea of what works and what doesn’t.
3. Budget wisely
There’s a fine line between big dreams and broken budgets, which is why setting a clear limit before your project begins is essential. Deciding on a strict budget prior to knocking down kitchen walls will ensure that you don’t overspend on renovations.
Once you have done your background research and gained an understanding of the end value, you can create a budget on what you can spend without overcapitalising. This will give you an idea on what outcome you can achieve and whether it will make a margin or not. It will also help monitor your cash flow and keep your finances in order, while you focus on projects that you can afford.
4. Make strategic renovations
For the renovate-and-sell brigade, first impressions are lasting impressions. However, it’s important to understand what renovations will boost or bust your property value. The key is to focus on renovating areas that have potential to generate the highest returns on your investment.
Real estate experts at Domain say your kitchen and bathroom are the top renovation areas for profit. A cosmetic spruce-up of these rooms can be a cost-effective way to update the livability and appeal of your property.
The property’s facade is another area that can prompt future buyers to stop and stare. Maximise your curb appeal by allocating external landscaping towards the front of your property, which can act as an emotional driver for buyers. Spicing up elements like the front door is the first step towards enticing buyers. On the flip side, overspending in low traffic areas will add little value to your property. So, don’t go crazy on floor tilings in the laundry room.
Eco-friendly features such as energy-efficient lighting and appliances are a few favourites among house hunters. Whereas high-maintenance features may drive them away, such as swimming pools and elaborate gardens.
5. Appeal to a wide audience
It can be tempting to bedazzle your building blocks, but some features are likely to put off potential buyers. While you may find bright yellow wallpaper to be attractive, not all buyers share your sense of style. The last thing you want is for interested buyers to factor in your renovations as a note on their cons list. It’s time to cut the emotional cord and begin renovating with a universal style in mind.
Maximise your appeal by adopting a simple renovation strategy that focuses on practicality and cost. If you are renovating to sell, it’s crucial you make improvements that will attract a broad audience. This way, you don’t limit the number of potential buyers and your property is likely to sell faster.
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Written by Charlotte Monteath
Charlotte Monteath is a Content Intern at Jacaranda Finance. She has a Bachelor of Business Management & Journalism from the University of Queensland.