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As a home owner or property investor, you may have heard the term ‘overcapitalising’. But what exactly is it and why is it considered bad?
While adding a new deck or kitchen can increase the value and enjoyment of your property, overcapitalising can end up costing you more than you planned. Here’s a closer look at what overcapitalisation is, why it’s bad, and how you can avoid it and still increase the value of your property. What is overcapitalising? Simply put, overcapitalisation is when the cost of a home improvement is more than the value it adds to your property. For example, if you buy a property for $500,000 and spend $100,000 on a new outdoor kitchen area with timber decking and fancy landscaping, it doesn’t automatically increase the property’s value to $600,000. If similar properties in your neighbourhood are selling for a maximum of $525,000, your eye-popping improvements are unlikely to increase the selling price beyond this – meaning you have overcapitalised. Why should overcapitalisation be avoided?
Aussies love investing in their homes. However, keep in mind that while certain renovations can increase the value of your home, there is an upper limit on what properties are worth at any given time. If you find yourself in a situation where you have to sell an overcapitalised property on short notice, you could find yourself losing out on your investment. Increase the value of your property without overcapitalising while overcapitalising is never a good idea, there’s no question that the right renovations can significantly add value to a property.