The dangers of over-capitalising

Works completed on a property rarely increase its value in a dollar for dollar value scenario.

Repairs and maintenance, such as carpet and paint are often needed and are sometimes essential for the sale of a property. Nevertheless, some larger works are simply an owner’s choice to improve their lifestyle. Don’t confuse this lifestyle decision with increasing your property’s value. There is a danger of spending large amounts of money for very little return – particularly in the short term.

Common examples of lifestyle improvements include a pool installation, adding a deck or house extension. These works require significant capital, as well as time and effort. If the property is sold soon after completion, the likelihood of recouping the full financial cost is low.

When considering works, first reflect on the motive behind the decision. The two keys factors are personal plans and ownership time frames.

A pool can provide many years of enjoyment for a growing family. Cooling down on those sweltering summer days, kids’ parties and entertainment provide a sensible and legitimate reason for the expense. However, if the motive is to improve the worth of the property, chances are the added value will be eclipsed by the expense – some buyers may even be deterred due to ongoing running costs.

The longer you keep a property, the more likely it is that the full cost of an improvement can be recuperated. Works will depreciate, while the land value with continue to appreciate over time.

If you’re looking to renovate or to make minor changes to a property purely for profit in the short term, it is always a good idea to consult your local agent. An agent will be able to advise you on whether the changes you are thinking of will actually provide you with a worthwhile return on investment or if you’re simply just over-capitalising in your current market place.

Original article by Andrew Trim with some changes made. Managing Director of Johnson Real Estate and author of ‘Real Estate Dangers and How to Avoid Them’

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