You should consider how much the renovations you are planning will increase the property’s value before spending time and money on renovating your home. Going overboard with home upgrades is among the most common mistakes homeowners make – and sometimes, instead of reaping huge financial returns, many end up spending more than they need to. Overcapitalization is a miscalculation.
What is overcapitalization?
Overcapitalization is when your renovations don’t increase the property’s value enough to allow you to recoup your investment should you decide to sell the house.
For example, spending $250,000 on home renovations that add only $100,000 to your property’s worth will result in a loss of $150,000 when you sell the property. You will have $150,000 more capital on your home than you need.
With proper planning and preparation, however, you can avoid this costly mistake. These are the essential things to do before you start your next renovation project.
1. Get an idea of the value of your home.
It is highly recommended that you get a professional property appraisal to determine the true value of your home. It is also possible to research the market prices for similar homes in your area. There are usually different thresholds or price limits that buyers or tenants can afford.
You can get a good idea of how much your property is worth and how it compares against other homes in your neighborhood. This will allow you to determine how much you can spend and what upgrades you can do while not spending too much.
If you are planning to upgrade an investment property or put your property in the market in the foreseeable future, the ideal renovation budget is about 10% of your home’s value – so, if your house is worth $850,000, allocating $85,000 to home improvement projects is reasonable. If you plan to stay in your home for the long-term and don’t intend on selling it, you may be able to spend more on home improvements that will make your home more attractive and comfortable.
2. Find out what renovations add value.
There are certain areas in your home – with the right renovations – can add tons of value. It is important to focus your home improvements efforts in areas that have the greatest potential to return on your investment.
Most property experts list the kitchen and bathroom as among the vital renovation areas that can easily increase your home’s value. The property’s façade – which is the first thing potential buyers see when they check out your home – is another location that can stir buyer interest. Many house hunters prefer large living areas and outdoor spaces. Eco-friendly features, such as energy-efficient lighting or appliances, are growing in popularity.
Some features can be a turnoff for buyers due to their high-maintenance cost, such as extensive landscaping and retrofitted HVAC systems.
3. You must set a budget and stick with it.
You can avoid overspending on renovations by setting a budget before you start. This allows you to organize your finances and make sure that you only spend on projects that are within your means.
4. Give your brand a wide appeal.
You should consider the appeal of your upgrades if you’re renovating to sell your house. You can limit the number interested buyers by doing this. You may find fancy décor or brightly coloured tiles attractive but not all buyers share your tastes. You can sell your house faster if the renovations have a universal appeal that allows buyers to visualize themselves living there.