Avoiding over-capitalisation

Buying a run-down property to renovate can be an exciting and lucrative project. However, there are potential pitfalls that it is important to be aware of.

Making money out of renovating and selling relies on a very simple equation: the sum of the purchase price and total renovation costs must be less than the eventual selling price.

This relies on a notoriously unpredictable mix of variables. Are you confident that property prices in the area are stable or rising? Will your ideas for renovation actually increase the property’s value in the eyes of the market?

It is common for renovators to lose as much as $100,000 on a project such as this by overspending, especially on items that won’t necessarily add to the value of their home.

It is difficult to predict the eventual selling price of a property, so it’s important to be cautious when deciding how to go about renovating.

Decision-making starts before you even purchase a property. It’s important to have an inspection carried out by a qualified building inspector who will advise you on immediate maintenance issues such as electrical faults, roof repair, rising damp and termite infestation. Having these put right is likely to be costly and must be considered as part of the equation.

Once you have taken the plunge you need to consider what type of renovation will pay for itself. Will it be a simple internal fit-out job, reconfiguration or a ground floor or upper level addition?

Important issues that will affect the value of the home include layout, quality of finishes and fixtures and whether or not items such as pools and spas will be a worthwhile investment.

Often, in the case of pools, the opposite is true. Maintenance and safety issues may be regarded as liabilities by a potential buyer which might actually bring the eventual selling price down.

Also, the quality and style of the renovation needs to suit the location. It may not be appropriate to create a massive Italianate mansion in a working class suburb where demand (and funds) may simply not exist for this type of property.

The new layout needs to be sensible, with room sizes and configurations adhering to current trends. Unusual layouts, such as main bedrooms opening off living spaces or bathrooms accessed from kitchens, will be less appealing to buyers.

Considering natural light and ventilation, as well as preserving original features such as fireplaces, stained glass and floorboards will add to the value of your home.

Over-investment in quality finishes and fixtures is another pitfall. It might seem that the more you spend on these items, the bigger your return will be. This is definitely not the case. In any given area there will be a maximum that potential buyers are prepared to spend.

Unless you are renovating in an exclusive area where properties regularly exceed $1 million, investing in expensive fixtures is unlikely to pay off. It’s important that finishes and fixtures are resilient and will scrub up well for your open inspections, but buying designer taps is not going to guarantee a higher selling price.

Another mistake is putting too much of your own personal style into a renovation. If you plan to live in a house for a number of years it makes sense to make it suit your tastes and lifestyle. However, if you are merely priming it for resale you need to focus on what look is likely to attract buyers.

A renovation project shouldn’t necessarily be seen as an opportunity to express your own style. Indeed, this may end up reducing the eventual selling price.

Looking at display apartments, design magazines and even furniture stores will help give you an idea of what kind of furnishings are currently considered cool. Ideally the fit-out should be fairly neutral and allow the future owner room to make their own mark on the home.

In general your aim should be maximum gain for minimum output. Think carefully what you can achieve within the existing footprint of the home and using existing fabric.

Prudent decision-making will maximise the eventual value of your home and make sure the venture doesn’t become a money pit.