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Make sure you don’t overcapitalise your investment property

By Rikki Cook

Investors are always looking for ways to add value to their portfolio. From redoing the kitchen to building a backyard patio, it’s essential to find ways to improve a property over time.

It’s equally essential, however, that you’re selective about the renovations you take on. That’s because when you put too much money into a property, you could actually make it more difficult to sell later on. This is called over capitalisation. Let’s take a closer look.

What is overcapitalising?

When the cost of your renovations outweighs the value it adds to the property, you have overcapitalised your investment. Over capitalisation also occurs when you add renovations that target buyers aren’t willing to pay for.

Say, for example, you buy an investment property for $800,000. Then you spend $100,000 renovating the kitchen. The house is now worth $900,000, right? Not necessarily.

If similar properties are only selling for $800,000, it will be difficult to find a buyer willing to pay an extra $100,000 for yours – even if you did spend that much.

How to avoid overcapitalising your investments

Smart renovations, however, can add significant market value to your home. You just need to be aware of which are the right kind and which run the risk of overcapitalisation.

Generally, you can avoid overcapitalising by keeping the cost of your renovations lower than 10 per cent of the total value of your property. While bigger projects can, of course, make your home more attractive to prospective buyers, you don’t want to get ahead of yourself – particularly if you plan to sell quickly.

You should also look for ‘quick fixes’ that can instantly enhance your home without requiring you to spend too much time or effort. Such alterations include:

  • Fresh paint,
  • New appliances,
  • Curtains and blinds,
  • Light fixtures,
  • Flooring,
  • Fibre internet.

Before undertaking any renovations, speak to a real estate agent or property manager. As industry experts, these people can offer you insights and advice on how to stand out in the Gold Coast’s current market.They know what buyers are after and willing to pay for.

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