Overcapitalising on your investment property can be an easy trap to fall into, writes Lynette Manciameli.
You plan a renovation on your investment property and before you know it you’ve paid too much; the cost of the renovations exceeds the value added to your property.
This can be a serious problem, as when it comes time to sell the property you won’t recoup the value of those renovations, making all of that time, money and hard work spent on the renovation a waste – not to mention seriously undermine your investment strategy.
So, how can you avoid overcapitalising on your property?
Consider the context
Will you hold onto the property for the long term or part with it in the short to medium term? What will a tenant be looking for in the home? These questions will help guide you on what to prioritise when renovating.
For example, if you will be renting out the property, it may not make sense to undertake an expensive kitchen renovation, unless you plan on holding onto the property for the long term. Resurfacing the kitchen may have a greater effect than spending a small fortune on the 40mm waterfall benchtop.
More simple cosmetic changes may not cost all that much but boost your rental return significantly.
Value the property
The best thing you can do is get the property valued. That will give you an idea of how much equity is in the property. You should also look at the values of other comparable properties in the area as well as properties that will be comparable to your finished product.
If you add an extra bedroom, how much is that likely to increase the value of the property? Is the cost of adding another bedroom below the added value?
Source the right builder
Working with a great builder who is trustworthy, transparent about their fees and as accurate as possible in their quote will give you peace of mind that your project isn’t going to blow the budget.
There can often be hidden fees in building quotes and contracts, so make sure you do your due diligence to get an accurate quote or work with a builder broker to represent you.
Another often overlooked cost occurs when the renovation runs over time and you lose out on rental income for weeks or months. To avoid this, you may opt to include a penalty clause where the builder pays your rent should the renovation run over time.
The last thing you want is for your building project to blow out on time or cost, while the quality is compromised. By taking the necessary steps to vet potential builders for your project, you can make sure you secure the right builder and get the best outcome.
Set a budget
Create a detailed budget which covers off on every aspect of your renovation and includes extra money as a contingency just in case.
Once you have everything listed in the budget, it will give you more clarity on how the project is progressing according to your forecast, as well as reveal any additional costs or opportunities to cut costs.
Make the right renovation choices
Spend money on things which add value, rather than things you personally like but aren’t widely desirable. That way, when it comes time to sell, the buyer will be willing to invest more.
Common renovations which add value include updating the kitchen or bathrooms, or adding bedrooms.
While these will add value, they can also be very costly, so make sure you examine the costs closely to ensure you’re not going to spend beyond the value they would add to the property.
By Lynette Manciameli, director, Builder Finders