Are you undercapitalising on your home?

You’ve heard about the evils of overcapitalising, but what about the equally problematic alternative, undercapitalising?

It’s a problem many Australian homeowners are facing; they just don’t realise it. While everyone’s been stressing about the threat of overcapitalising, its evil sidekick has swung in to take us all by surprise. There are factors at play in Australia’s housing market which might put you at risk of undercapitalising on your home.

Many Melbourne homeowners may be undercapitalising on their biggest asset: their home

Widespread housing shortages and the lack of housing in areas close to cities and services means there’s strong demand for fully renovated homes, even as markets cool. Buyers are wary of purchasing a renovator’s delight or a fixer-upper, due to high inflation and building industry uncertainties, but their appetite for renovated three to four-bedroom homes that suit our modern lifestyles has not waned.

“With all the negative media and decreased consumer confidence, there is currently a clear flight to quality properties in Melbourne, with A Grade homes and ‘investment grade’ properties still in short supply for the prevailing strong demand, but B Grade properties are taking longer to sell and informed buyers are avoiding C Grade properties”, explains Michael Yardney on Property Update.

So, if you’re sitting on a property in an inner or middle-ring suburb or regional city, and your home hasn’t seen a renovation since prawn cocktails were a dinner party staple, there’s a high chance you’re undercapitalised. Even if you have donned some Suzie Wilks-style pastel shorts, splashed around a few coats of Lexicon Quarter, updated the bathroom, and replaced the kitchen a few years ago, it’s worthwhile considering how a more extensive renovation might allow you to take full advantage of your property.

This becomes particularly pertinent if you’re considering moving to find a home that better suits your needs. If you love your neighbourhood, but you’re stretched for space, packing up and moving means not just a lengthy search for the right property, it exposes a number of hidden expenses. From agent campaigns and commissions, to conveyancer fees and stamp duty, the decision to sell up and buy a new home can easily tick over into the tens and even hundreds of thousands of dollars.

Plus, the realities of the market at the moment mean the sale of your existing home may take longer and not reap the rewards you were hoping for. And, as you battle the open for inspections every Saturday with the kiddos whinging in toe, you’ll be competing against other motivated buyers who are looking for a ready-to-move-in, fully renovated home in a desirable location, just like you. It’s a double whammy.

All this is assuming you’re able to find the home that suits your specific needs: location, size, layout, style (the list goes on) within your budget. Finding this unicorn property is itself an epic challenge. 

In many cases, it becomes more prudent to renovate your existing home instead. This gives you the opportunity to create the ideal home that works perfectly for your family and lifestyle. What’s more, renovating to create your ideal home is the best way for you to capitalise on the value of your property which is not currently being appreciated by the market.

In order to fully capitalise on your property, it’s important to understand how much your home could be worth after the builders have packed up their tools and completed your renovation. The best place to start is to do some research on recent property sales in your area and speak to a local real estate agent. Be sure to compare homes that are similar to what you plan to create, with the same number of bedrooms and bathrooms, modern living spaces and ideally homes that have also had a high-quality renovation recently. Remember to factor in the land size and try to compare houses that have a similar plot to you. This will give you a good idea of how much you should invest in order to maximise the value of your home. Similarly, speak with an architect about your home and the potential to renovate to achieve what you require to better understand what’s possible and likely costs.

If you’re either settling for a home that doesn’t meet your needs, or trying to find a new home that does, you’re impacting the value of what is probably the largest investment you’ll ever make: your family home. Don’t undercapitalise. Instead, think about how you could renovate to create a home that better suits your needs now, and will be more attractive to future buyers to boot.