Property Investment - 9 Jul, 2019

What is overcapitalisation?

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All homes have a maximum value they’ll achieve based on location and size so if your purchase price and renovation costs exceed this amount, you’ve overcapitalised. Here’s how to avoid doing it.   

There are number of factors that need to be taken into consideration when making improvements to a property, especially if you want to avoid over capitalising, says Anjay Zazulak a buyers agent and serial renovator. While it’s a mistake to go overboard on upgrades, and common to underestimate how much the improvements will cost, it’s also true that doing some improvements to a property can help you achieve a higher sale price so the trick is in finding the best balance.

The common trouble spots

Zazulak says owner occupiers often over spend on fixtures, technology, inclusions, white goods and building materials plumping for marble or Italian tiles, for example. While they are making these choices for their personal tastes and because it’s their home, it often doesn’t translate into a comparably higher sale price when they move on.

“On an owner-occupied property you might spend a bit more than normal on the basis that you are going to stay there for a very long time and want to enjoy the comforts, which is fine, but take care that over the long term it will even out,” he says.

Investors, on the other hand, tend to make their biggest mistakes by failing to create a strategic plan for the renovations. This should involve deciding how to cater to what is currently in vogue in the neighbourhood and preparing a budget based on the strategic plan, then sticking to it.

Strategies to maximise your profits

Your guide to Adelaide’s property market and its house prices

Adelaide is one of the fastest growing property markets in Australia and it’s not hard to see why.

You should always get a detailed costing of the works you want to carry out, with realistic figures, Zazulak says. Add the amount to your purchase price and consider if you would achieve this new figure if you were to sell the property. “This is a good benchmark to establish overcapitalisation,” he says.

“When we go about choosing our own investment properties to renovate, I’ll ask the agent what the property would be worth once renovated. This dictates how much we will allocate to the spend,” he says.

In terms of renovations that’ll add the best return on investment, Zazulak says there are a lot of things you can do to improve the property without spending huge amounts. He suggests doing as much as possible yourself, starting with a thorough tidy up inside and out. “A nice garden will improve appearance and add value and doesn’t have to be expensive,” he says.

If the property looks tired, there are loads of low-cost ways to improve the appearance and bump up the resale value. He suggests a fresh coat of paint inside and out, and if the property has floorboards that are in good condition, sanding and polishing will smarten the look. If not, replace shabby carpet and thoroughly clean tiles and grout.

Which rooms reap the best return

Reviewing the condition of the bathroom and kitchen is more expensive but rate highly with buyers, so are often worth a little extra investment (bearing in mind the math needs to stack up the level of work required and the expected standard for the area and style of home should be priced before purchasing the property.) “However, even in these areas it is possible to not spend a lot you could replace handles with a more modern version and respray or replace cupboard doors for a quick lift, for example.”

Neither last nor least, think about improving the layout Zazulak says has two or three living areas, consider if converting one into an extra bedroom an inexpensive task, will create more value and instant equity.

Before deciding on what you’ll be revamping and how much you’ll be spending, a chat with your local real estate expert will reveal what people expect in the area in terms of features and spec level, and what they’ll pay for it. This will help you work out where to spend and where to save to get the most return for your time and money investment.   

Thinking of investing in property? Speaking to a mortgage broker could make it easier for you to understand the ins and outs of property investment. eChoice has access to hundreds of products across a panel of multiple lenders, so we can help you find a competitive mortgage.

Words by Melanie Hearse

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