Be carteful not to over-capitalise when renovating
The Real Estate Institute of Queensland (REIQ) recommends making the final decision to renovate as carefully as you would make any other investment decision.
“Overcapitalisation can be a risk for renovators buying a house and living in it only a few years,” REIQ managing director Dan Molloy said.
“Over a period of 10 years, overcapitalisation on a home is negligible because of depreciation and rising land values. However, if you move every couple of years it’s a different matter.”
Overcapitalisation occurs when an owner spends more money on improving a property than the profit those improvements could be expected to bring if the property were sold.
The REIQ recommends research and a simple formula to minimise the risk of overcapitalising, while adding value and valuable living space.
“First of all, note the price you paid for the property, add the expected total cost of the renovations, add another five per cent for landscaping and you have the cost of your house and improvements,” Mr Molloy said.
“Let’s say the total cost is $510,000. Next look at houses in your street and check newspaper real estate ads featuring nearby homes.
“If there are no homes valued as high as the $500,000 mark, then you are probably overcapitalising. Only proceed with the renovations if you plan to live there for the next eight to 10 years, or if you’re confident your suburb will be the next to boom.
“While it’s an overused real estate phrase, always remember that choosing ‘the worst house in the best street’ is clever buying for those wanting to renovate.”