Over-capitalising is an issue most investors are aware of; however the Real Estate Institute of Victoria (REIV) warns that now is an important time to weigh up costs and benefits.
Investors and owner occupiers alike may be tempted to renovate while the property market is strong, as prices should be expected to rise and expenditures will be made back with profit when it’s time to sell.
However, the REIV warns that with the property market on the very edge of peaking, now is not the best time to renovate due to the high risk of over-capitalising.
“Overcapitalising – spending money on a property which may not be recouped by an increase in its value – is a risk for both investors and owner occupiers,” the REIV said in a statement.
“We never know what the future will hold – unexpected events may require us to sell, so it is always wise to ensure your home is not overcapitalised.”
The median price of a home in Melbourne reached a record high in the last three months of 2013 to $643,000, up 11 per cent in rolling annual terms.
However, the rate of growth is expected to slow during 2014.
“It is not the time for major renovations unless you can be sure they will boost the property's value to cover their cost and hopefully, make a profit.
“If you are contemplating renovations, it's important to know your property’s current value and what it would be worth with that work completed. Within any area, the pool of buyers is only so large, and if your property is well above the median price – even if it is superior to many homes the same size – it may take longer to sell.”