Thanks to the real estate boom witnessed in the last few years, property prices are not what they used to be. This means that you have to take care while renovating them. They are already priced towards the higher side and if you overcapitalise on the home renovation, you may not be able to eke out a decent profit margin for yourself while resale.
The fear of overcapitalising is real
Home renovation, it is needless to say, is a brilliant strategy. However, if you execute it in a flawed way, it will not only bite your purse but also hit your dream of ROI hard. So, before we try to wean out ‘overcapitalising’ from the picture, let us figure out what it actually is.
What exactly is overcapitalising?
Briefly put, overcapitalising is when you invest more dollars in your renovation than you should, thereby improving a home beyond its resale value.
And now here are my tips to ensure that such a situation does not arise.
Comparable sales figure will give you a good clue (on how much you should spend)
Take a good look at the comparable home figures data. It is not the easiest to lay your hands on. You will have to do some digging with the local council or other reliable sources. This data informs you for just how much have homes similar to your home, and within a short radius, have sold in the last 3-6 months.
It is quite logical to expect that your home, too, will fetch a price close to them (all of them being of the same type and belonging to the same neighbourhood). Now, if your renovation takes you beyond the resale value suggested in the comparable sales data, then it can hardly be worth it. It is safe to keep renovation expenses to a point where you fetch a decent profit margin even after a buffer of 10% from the comparable sales figure. After all, you may not be as lucky as your neighbour. While on it, let me just add that it is wise to get your home independently valuated.
What is your goal- reselling or putting on lease?
Are you looking for a resale or a lease? Your renovation effort will be based on how you answer this question. For a particular area, what prospective buyers seek and what tenants seek may be two different things. It is so because the demographic profile for both of them may be as different as chalk and cheese. For instance, the same area may have a majority of baby boomers as part of the buying group and students as part of the renting group. Obviously, your home renovation effort will need to focus hard on just what you are planning to do with your home.
The term ‘Overcapitalising’ has a pretty big canvas
Overcapitalising has a broad canvas. It does not only imply that you stick close to the planned budget but also means that you execute your strategy of renovation well and be practical (and not get carried away) at any stage of the process.
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