Over Capitalizing
A recent discussion with my mother about over capitalizing on renovations got her worried.
She asked me if she had over capitalized by painting the inside of her house and getting new carpet when she moved in 2 years ago. “No Mum, you’re fine, you haven’t over-capitalized”. She felt much better after that.
My interior design work involves a lot of home renovations. One topic I am often talking about with clients is how to intelligently spend their reno budget so that they get a fresh new look and improve the function and living conditions for them whilst not over capitalizing.
“Over capitalizing” can be a broad term and I think it needs to be assessed on a case by case basis. However, there are general categories I look at when discussing jobs with clients.
Making sure the finished house is in proportion to the cost of the land
An example of this is a premier residential sized block of land worth $1.5m and after a significant reno the house is still undervalued in comparison because it does not match market expectations. The new house only has 3 bedrooms, 1 bathroom, no WIR, small kitchen, no butler’s pantry. The reno result must be proportionate to the land and buyers’ expectations.
Ensuring what you spend inside is in keeping with the cost of the building structure
Do not install a new $60 000 kitchen if the house is just a fibro shack. Same with the bathroom. These are the 2 most expensive rooms in a house.
Weighing up the extras in comparison to the house and land costs
I once saw a case of a new pool becoming more expensive than that actual house. The owners built a pool on the part of the block with the most difficult site access. The pool company would not give a fixed price as the site was too difficult to confidently quote, so the owners paid an hourly rate. By completion, the pool was more expensive than their house and they had run out of money for the house renovation.
Best street worst house
The old saying that this is what you should aim for in real estate purchases. And the flip side is that if your house is not in the best street keep your renovation on a similar level of the surrounding houses or the neighboring houses may limit potential profit in a future sale.
How long do you intend to stay in the house?
Is this your Forever House, or only for 5 years? We do not always know what the future holds, but if you are confident that you’re staying long term, perhaps you can throw some caution to the wind and do something obscure and personally appealing. If all goes to plan by the time you sell in 20 years the house will be ready for a big reno again and the new owners can rip out your hot pink animal print bathroom that has well and truly given you your money’s worth.
If in doubt speak to the professionals who deal with these issues every day.
