A guide on how to avoid overcapitalising on your investment property

Couple renovating their property

New Zealanders love renovating. We devour reality television shows (Grand Designs, anyone?) and magazine spreads of lush interiors, and we make surplus trips to DIY shopping barns. However, when it comes to renovating our own property it might be a good idea to avoid overcapitalising.

Whether you're renovating an investment property or getting your own house ready for market, making improvements that exceed the value of your property is referred to as overcapitalisation - and it’s a rookie error that is best avoided.

Armed with the right research, you could make improvements to your property that can both maximise rental return as well as increase your property’s resale value. Budgeting is one way to ensure you don't spend more than what your property is worth. 

Establish an accurate value of property

Research, research, research

Start by establishing an accurate value of your property. Research recent sales in your area to find out exactly what comparable properties have sold - those that are renovated and those that are not. This will give you a picture of the pricing in your area and highlight potential opportunities. For example, if your property is valued at $300,000 and similar renovated properties are selling for around $450,000, this would suggest that spending more than $150,000 on your renovation could lead to overcapitalising.
Getting bang for your buck

Getting bang for your buck

Continue your research by finding out what types of features buyers are looking for and which types of properties are attracting a premium return. Is your property in a neighbourhood predominantly of families? If so, upgrading the kitchen or adding a second bathroom could be more sought after than a high-tech wine cellar or four-car garage. 

Think about what will create a lasting impression on buyers. Quality floor coverings, neutral yet stylish kitchens and bathrooms are classic favourites. While big wow factors can help sell a home, also weigh up the costs from that impact. Is it worth spending the money to renovate the whole bathroom or should you just update some of the fittings? Thinking pragmatically about the investment property renovations and the returns you can expect can help you stay within budget. 

Budget carefully

Budget carefully

It’s always best to think conservatively when setting a budget because the market can change. Speak to friends and family who have renovated and get a clear picture of costs. Don’t forget to factor in the odd unexpected expense such as repairing a blocked drain. Think about setting up an emergency budget so you can better manage the unexpected. If it is an investment property, the building may be untenanted while you work on your investment property improvements, so you may not be receiving any rental income. Find out how to plan and budget for a renovation project.
Finance options

Finance options

If your research stacks up and you’re ready to start improvements to your investment property, you might want to consider the most effective way to finance your renovation project. If you need to borrow funds, it might be a good time to look at refinancing your current home or investment loan. Get up to speed on refinancing your home loan.

Smart renovating is one way you can unlock value in your property, just remember to renovate with your head, not your heart.

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