How to avoid over-capitalising on renovations
March 19, 2014 / Written by Rich Harvey
Renovations are intended to make your property more attractive, comfortable and valuable. Unfortunately, it's that last one many Australians struggle with.
No matter what you plan on using your home for - renting it, selling it or living in it - buying a house in Australia is a form of investment.
Even when you find a bargain, property doesn't come cheap, so it only makes sense to maximise your investment as much as you can.
The right renovations can help you do this, transforming a drab house into a cash flow positive property or simply ensuring your family's home has a better chance to sell for more than you originally bought it for.
Data shows that plenty of Australians understand the value of renovations.
A report from Mortgage Choice last year showed 43 per cent of surveyed mortgage holders were planning a renovation. Oftentimes, increasing a home's value came second to improving quality of living.
"While renovations can potentially increase the value of a property, our survey results show that the purpose for many Australians is to improve their lifestyle by customising their home to suit them," said Belinda Williamson, head of corporate affairs at Mortgage Choice.
"This lifestyle focus was further highlighted by the fact that of those Australians intending to renovate, 15 per cent were looking to renew their outdoor entertainment area first. This was among the top three most popular areas to renovate and followed upgrading the kitchen and bathroom at 28 per cent and 27 per cent of respondents, respectively."
However, there's a fine line between spending money to make your property more desirable and over-capitalising on your renovations.
Put simply, over-capitalising is when the cost of renovations outweighs how much value it will add to a property.
Luckily, there are plenty of strategies you can use to avoid this.
Start with valuation
Your first course of action should be to have your property valued by a professional. How much it's worth may have changed from when you initially purchased it, and it's important to get an independent view regarding its value.
Once you know how much your home is worth, you can narrow down the amount of money you plan to spend. After all, it won't make much sense to spend tens of thousands of dollars renovating a property with a low value.
Consider your neighbourhood
In addition to your property, it's important to take surrounding homes into account. Neighbourhoods will generally have a ceiling value, meaning a certain threshold buyers and renters are willing to pay to move in.
If your ultimate goal is to attract tenants or home buyers, spending a small fortune to push up the value of your home won't do you much good if it's located in an area where home seekers are unwilling to pay a higher price. In short, luxury mansions call for different renovations than starter homes.
Create a budget
Next it's essential to formulate a budget. Beginning the renovations process without a firm dollar value in mind is a recipe for overspending.
When you know how much you're willing to spend, you can get your finances in order and focus on renovations that fit your budget.
Don't make it personal
If you're renovating a home you live in, it can be easy to get personally attached to what changes you make.
While it may be important to have a comfortable and well-made home for you and your family, think about which renovations make the most financial sense and will appeal to a wide range of people.
You may want a house with a swimming pool, but the cost of such a renovation could outweigh the value it adds to your property, as well as push potential home buyers who don't want the upkeep responsibility away.
Make strategic renovations
Keep in mind what renovations will bring the most value to your home. Upgraded kitchens and bathrooms are perennial favourites. Meanwhile, renovations that make homes greener - increasing efficiency, reducing energy bills and benefiting the environment - are becoming increasingly popular.
On the other hand, making renovations that will limit what future renters or buyers can do with a home is a bad idea.
You may want to transform your spare bedroom into a library complete with huge bookshelves and ornate lighting, but by customising the space and changing its structure, you're ensuring that future homeowners will either have to share your interests or be forced to pay for renovations of their own.
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