How to Avoid Overcapitalising on Your Renovation—the Basics.

Whether you’re renovating an investment property, improving your home ready for sale, or creating your dream home, it’s important to consider how much the planned renovations will increase the value of the property come sale time. Overcapitalising on the renovation—that is to say, spending your hard earned cash on improvements which don’t significantly increase the value of the property—can be fraught with danger. Inadvertent overcapitalisation is likely to be more of a concern for investors and owners who are planning to sell straight away than it would be for a family who plans to raise their kids in the home for years to come, but all would-be-renovators should take the time to think through a few key points before their builder gets to work.

What is the property currently worth?

Start off by having the property valued by a real estate agent. This is your reference point—ideally this figure will increase post-renovation by around the same amount as the cost of the improvements. Some real estate agents will be more than happy to chat about the improvements you are planning and give their opinion about what type of return you’re likely to get. Remember, the higher the sale price, the better the agent’s commission, so use their eagerness for a valuable listing to get some good advice.

What are properties selling for in your neighbourhood?

Do a bit of research on property prices in your local area. Compare the sale price of homes similar to yours with those similar to what you’re hoping to achieve with a renovation. Many neighbourhoods will have a price cap—it doesn’t matter how fantastic a home is, there is a limit to the amount buyers are willing to spend on a property in order to move to the area. Someone who can afford to spend the money you’d want for your gorgeous, newly renovated home may not be seeking a property in your neighbourhood. Keep this in mind.

Know what type of improvements bring in the cash.

Improving the landscaping with a $20,000 retaining wall is unlikely to reap you anything close to an extra $20K on the sale price but updating a decades-old kitchen or bathroom and creating a functional outdoor entertaining space will make your home much more desirable.

Set a budget.

It is vital that you have a budget set before any renovations commence. Be open and honest with your builder about your budget so they can help you to maximise it. Being indirect about your finance or winging it and seeing how much things cost as the plan develops can result in a budget blowout and your expectations unmet. If you’ve put time into selecting a quality, professional builder you’ll benefit from all of their experience. Let them help you to direct your budget into the projects which will generate the greatest return.

Aim for broad appeal.

If you’re an investor or have chosen to renovate your home in preparation for sale it is critical that you keep the appeal of the home as broad as possible. Don’t limit the number of people who’ll be interested in the property by selecting décor which will alienate a chunk of the market—keep it neutral. Likewise, don’t renovate to your own tastes or lifestyle which will lock potential buyers with different tastes or needs out of the race.

If you’re renovating to create your dream home some of these considerations will be of less importance. If you need that retaining wall to make your backyard a safe, comfortable space for your kids to play for the next decade, losing money on it isn’t such a big deal. Also, you’ll probably want to redecorate or possibly even do some further renovations down the track so the pink bathroom tiles you’ve chosen won’t be such a deal breaker. Keep in mind, however, that you’ll be downsizing at some point and sacrificing a living space to install a kiln, pottery wheel and custom shelving will mean having to undo it all later. But, if pottery’s your life and you’re prepared to splash the cash in order to spend a decade living it, by all means, go right ahead.

What do you want out of it?

All this means that before you get started renovating you need a clear idea of what you want out of it—and your partner needs to be on precisely the same page. Want to earn more from the sale? Keep things neutral and renovate the obvious, most impactful areas of the house—kitchen, bathroom, additional living space.

In it for the long haul? Make the home yours, just the way you want it, but while doing so, think about the things that may need to be un-done later and what that will cost you. Your builder is a wealth of knowledge and ideas, use them to help you achieve what you want in the most practical and cost-effective way. Professional builders maintain their reputations by creating happy clients.