Overcapitalisation: Is it really a big deal?
Are you thinking of doing a renovation or adding an extension to your home? Are you concerned about overcapitalising? Is it really a bad thing or something you should worry about?
If you are renovating a Gold Coast property with the intention to sell it quickly for a profit, than yes, overcapitalising is a very bad thing.
I hear this term from prospects who have owned the property for a while, and intend to stay there for many more years, than you don’t need to concern yourself with whether or not your renovation has overcapitalised. Let me explain.
Overcapitalisation simply means that you have spent more money on your home than you can recuperate at the time of sale.
Is the Reno cost more than you expected?
If you have no intention of selling your home in the near future, then chances are the extra you invest now will be offset by the growth in property prices over the coming years. And given the way the property market in Southeast Queensland, chances are it will not take many years before your property is worth significantly more than you have invested.
Some people have become so hung up about overcapitalisation that they go without many of the things they ideally wanted, just to keep their property at somewhere near a perceived sale price, yet they have no intention of selling it in the next 5, 10 or 20 years. By that time the extra they could have spent to have everything they ever wanted will be offset by the growth in property prices.
I have known people to cut back on their home renovation wish list on properties that they don’t intend to sell within 5 years, and yet they cut back because they might be overcapitalised!
Overcapitalisation is ONLY an issue if you intend to SELL your home SOON, providing you don’t go over the top. If you’re not looking to sell, or have no plans to sell in the next 5+ years, then chances are it is not something that you should lose any sleep over because you are going to improve your lifestyle now and still reap the reward (profit) later.
To give you an example of this, clients of mine purchased a property for a little under $450,000 and then invested a further $90,000 in renovations (+20%). Certainly, at the time the renovations were completed they had ‘overcapitalised’. But when they put the property on the market only a few short years later, it sold for $750,000. A $210,000 increase. Not a bad return on investment.
Reno (25%) +$140,000
Property Value $635,000
Property Value Renovated un-renovated
Value $635,000 $565,000
+ 1 year $675,000 $600,000
+ 2 years $715,000 $636,000
+ 3 years $755,000 $675,000
+ 4 years $800,000 $715,000
+ 5 years $850,000 $760,000
10 year profit $420,000
The interesting part of this example is that if you overcapitalise in the right area, with the right design, coupled with property growth, than the investment will take very little time to grow well beyond the outlay. In this example, only 2 years to recoup a 50% overcapitalisation.
After 5 years $145,000 profit. After 10 years $420,000 value gain while having enjoyed all the benefits of having undertaken the renovation work.
Of course there are limits. If you renovate during a stagnant market or if you purchase a property for $700,000 and spend $1,300,000 on renovations, than chances are that you may not recoup your investment for a long time. If you are concerned than speak to an accountant or financial planner, but if you intend to live in the home long term you’ll find that you have very little to worry about.
Not sure how much to spend?
From my experience, when wanting to sell, cosmetic renovations should be within 10% to 20% of the property value. For a home in a good location, where you will stay for the next few years, investing 30% of the property value on a renovation transformation should not be a problem at all. In saying that, I have been involved in mayor renovations where the work exceeded the value of the home with instant equity upon completion.
At the end of the day, your goal is to maximise the benefit of the renovation by making your home more functional and appealing for your family’s needs and lifestyle.
Setting your Renovation Budget
We ask you about your budget before we start the design and feasibility process, which ultimately saves you time and disappointment. It’s now time for the million dollar question. How much should you spend and what does a quality renovation actually cost? The simple answer is that it depends a lot on your goals and the choices you make. Now that’s obviously not super helpful. – so click here to see my price guide.
Designing your Gold Coast Home Renovation
Designing your new renovation can be a really fun creative journey, or a daunting experience. May I recommend that you do some online reassure and find images of design styles you like and may want to incorporate into your design.
There are many options and design choices that need to be made, and it’s easy to fall into analysis paralysis. If you are getting overwhelmed or having trouble getting your dream design together than our talented team can certainly give you the confidence and assist you every step of the way.
The design stage normally includes a concept sketch, drafting of plan, a specification and selections of inclusions such as colours fittings and fittings. Whether your tastes are simple or sophisticated, we have what it takes to deliver what you’re after.
Design, build, project manage
If you’re looking for the ultimate in peace of mind then a design/build/manage renovation builder is for you. There are a few incredible advantages to going this route. We can talk to you about potential costs and that the designer and builder are on the same page and working within your budget. Good planning and project management leads to a smooth stress free process. This level of integration and cooperation eliminates the stress, mess & guess.
Ready to get started with your Gold Coast Renovation?
From a single room, to an entire house renovation, we can do it all. We manage everything from start to finish. I’d love to talk to you about your unique renovation project and find out if we are the right fit for you
Want to learn more about renovation projects that can improve not just your home, but also increase it's value? Call Andre today on 1300 772 123
We design, build and project manage and deliver you a beautiful, stress-free, worry-free and regret-free luxury renovation that’s perfect for your family’s needs and budget.