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Wednesday, 06 December 2017 04:32

Overcapitalising: What it is and how to avoid it

As a home owner or property investor, you may have heard the term ‘overcapitalising’. But what exactly is it and why is it considered bad?

While adding a new deck or kitchen can increase the value and enjoyment of your property, overcapitalising can end up costing you more than you planned. Here’s a closer look at what overcapitalisation is, why it’s bad, and how you can avoid it and still increase the value of your property.

What is overcapitalising?

Simply put, overcapitalisation is when the cost of a home improvement is more than the value it adds to your property. For example, if you buy a property for $500,000 and spend $100,000 on a new outdoor kitchen area with timber decking and fancy landscaping, it doesn’t automatically increase the property’s value to $600,000. If similar properties in your neighbourhood are selling for a maximum of $525,000, your eye-popping improvements are unlikely to increase the selling price beyond this – meaning you have overcapitalised.

Why should overcapitalisation be avoided?

Aussies love investing in their homes. However, keep in mind that while certain renovations can increase the value of your home, there is an upper limit on what properties are worth at any given time. If you find yourself in a situation where you have to sell an overcapitalised property on short notice, you could find yourself losing out on your investment.

Increase the value of your property without overcapitalising

While overcapitalising is never a good idea, there’s no question that the right renovations can significantly add value to a property. Some areas where home improvements can make a big difference include:

 - new curtains or blinds

 - a fresh coat of paint inside and out

 - updating light fittings with modern fixtures

 - renovating an old kitchen or bathroom

 - refinishing floors and replacing carpets

 - adding a carport or garage

When it comes to renovations, the key is to increase the kerb appeal without exceeding your budget. Consider your neighbourhood and the types of features that buyers or renters are likely to be looking for, and be willing to set your personal preferences aside. While you may enjoy having a beautifully landscaped yard or pool, the next person living in the house may not. In other words, it pays to be practical.

A good rule of thumb

In general terms, you’ll probably avoid overcapitalising if you keep the cost of your renovations to less than 10% of the value of your home. The less you need to invest in your home to give it that wow factor, the more you can expect to get back when it’s time to sell.

And always keep a close eye on the sale price of similar properties in your area. With many people continuing to depend on property investments to meet their financial goals, it’s important to make sure you have the right information and tools on your side. 

Happy reading - and feel free to share with anyone who may find this info useful.



If you’d like to have Jamie provide advice on your finance structure, investment strategy, first home purchase, upgrade or refinance simply complete and return this FORM and he will be in touch - this is a FREE, no obligation service. 



The information herein is not intended as investment, financial, legal, taxation, building, development or any other advice and must not be relied upon as such. You should obtain independent professional advice and make further independent enquiries before making financial, legal, taxation, building, development or investment decisions.

Published in Blog Post
Tuesday, 25 April 2017 22:02

Pros and Cons of buying Off the Plan

Off the plan properties can look appealing. I get it! I find myself gazing into the brochures and television adverts– getting lost in the wonderful images of happy families feeding ducks in the park. The young, urban hipsters holding their freshly brewed, single origin lattes in the funky café that will open in the new development.

Are off the plan properties a good purchase? It’s a tough question with no right or wrong answer.

This article provide a rundown on the pros and cons of purchasing off the plan properties from my personal point of view. As always, please carry out your own due diligence on any property purchase that you’re considering.  My thoughts are general in nature and are based on my own experiences and those of some of my clients.

What are some of the positives of purchasing off the plan?

Your property could be worth more than you paid once it’s completed

If you’ve bought into a market that’s experiencing an upswing in growth then you might find yourself owning a property that’s worth more than you paid once it’s completed.  Whilst this is rare -  I have seen this occur with clients. Particularly those that purchased in Sydney before the recent upswing in prices – as well as some areas of Canberra.

When this does happen – there are a few lenders that will consider the value of the property (rather than the purchase price) when deciding how much they are willing to lend. This can be great if you’ve only got a small deposit because the increased value may mean you avoid paying Lenders Mortgage Insurance (LMI).

Higher depreciation

When a brand new property is purchased as an investment property – the owner might be able to claim a higher level of depreciation on fixtures and fittings as a tax deduction compared to an older property.

First home Buyer benefits/concessions

Most states and territories provide some sort of concessional duty for First Home Buyers purchasing a new property. They usually provide a First Home Owners Grant as well. Check out what’s available in your area by getting in touch with your local State Revenue Office.

Lower repair costs

In theory – if the property is new then there shouldn’t be as much need for immediate repair which will save you some money.

Getting into the market with a relatively small deposit

This can be appealing – especially for first home buyers. You can get into the market now for a relatively small outlay of 5% or 10% of the purchase price – and then you’ll have the time between paying your deposit and settlement to continue to add to your savings and thereby reduce the amount you need to borrow.

What are some of the negatives of purchasing off the plan?

Valuations coming in lower than purchase price

The single biggest risk with off the plan properties is valuations coming in lower than the purchase price. When this happens – the bank will lend against the valuation result rather than the purchase price.

This means that the borrower will need to contribute a larger deposit to get finance approved. If they can’t contribute a larger deposit then they might have to pay LMI as the best result -  or possibly forfeit the purchase and lose their deposit (as the worst result).

The bank won’t approve your loan until the property is built

Normally when purchasing a property you can make your offer “subject to finance” (unless it’s an auction purchase). This enables you to carry out your building/pest inspection and apply to the bank for finance approval.  Once finance approval has been issued you can go unconditional on the purchase and pay your 10% deposit.

With off the plan properties you don’t have that luxury because the bank won’t approve your loan until the property is built and they can carry out a valuation. Therefore, in this instance – you pay your 10% deposit upfront (without getting finance approval from the bank) and then apply for bank approval when the property is finally built.

As you can see – this can be risky. What if the bank doesn’t approve your loan once the property is completed?

You’re probably now asking “but can’t I get a preapproval?” If the anticipated completion date is within 3-6 months of signing the contract then you might be able to obtain a pre-approval from a lender but they will still require a valuation be completed on the property once it’s completed. They will also want to see updated supporting documents to verify that your income/liability situation hasn’t changed since the pre-approval was issued.

Time frames can blow out

Off the plan properties aren’t always completed on time.  The proposed finished date is only an initial estimate and it’s not uncommon for the expected completion date to be extended by months (possibly longer). This can be a good or bad thing – if it’s an investment property then the extra time might be welcomed as you won’t be making any interest repayments on the loan until you settle. If it’s an owner-occupied purchase then you’ll probably be keen to get into your new home sooner rather than later.

Higher Price

Just like a new car or any other new product – a new property generally commands a higher price. Just like that new car or product – the value tends to take an initial dip once that shiny newness wears off.

Have you decided that off the plan is the right option for you?

All in all – if you’ve decided that purchasing an off the plan property is the right option for you then to mitigate risk, from a finance perspective, I would:

  • Aim to have a large deposit to contribute to the purchase just in case the valuation comes in low once the property is completed. At a minimum – I’d aim to have a 20% deposit to contribute but I also understand that this is no easy feat. Especially for those saving for their first home in one of the capital cities;
  • Have a mortgage broker assess your current situation and give you an idea of whether you’re likely to present a strong application in the future. Keep in mind that they can’t guarantee you’ll obtain finance approval once your property is completed – but they should be able to give you a reasonable idea;
  • Ensure that the internal living areas of the property are larger than 50m2. Most banks are ok with 50m2 or above – whilst only a few have an appetite for anything with less.

 I hope you’ve found this information helpful. If you have any questions at all - feel free to get in touch.


About the author: Jamie Moore is an active residential property investor and owner of Pass Go Home Loans. If you’d like to have Jamie provide advice on your finance structure and investment strategy, simply complete and return this FORM and he will be in touch - this is a FREE, no obligation service. This information is of a general nature – please always consult taxation professionals about the specific nature of your situation.

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