Overcapitalisation

If you have been to one of the numerous property investment seminars that have been doing the circuit over the years, chances are you have heard the term ‘overcapitalisation’. There is also a chance that you have been told that it’s potentially a bad thing.

If you’re building a new home with a view to selling it quickly for profit then yes, overcapitalization is something to be very conscious of.
But if you’re building a home with the intention of living in it for a number of years, then chances are you need not concern yourself whether or not you have overcapitalised.

To understand ‘overcapitalisation’ stop and think for a moment what it really means. Put simply it means you have spent more money on building or renovating than you are likely to recoup should the property be put immediately on the market for sale.

So if you have no intention to sell the property in the near future, then the extra money that you have invested will more than likely be offset by the capital growth you will receive over the coming years.

Of course there are exceptions. If you purchase a property in a street where all homes are similar for say $700,000 and you then invest $3 to 4 million on knocking down and rebuilding then chances are it will take a long time before the home will be anywhere near the amount you have spent on it.

As long as the level of investment is within reason, then there is no reason to not create your home the way you want it. Of course if you’re concerned or unsure, talk with your accountant or financial advisor.

So many people get hung up about overcapitalisation that they go without many things they want just to keep the property value at a somewhere near an immediate sale price yet they have no intention of selling in the next 10, 15 or 20 years. By that time the extra they could have spent to get everything they wanted would have been more than offset by the growth in property prices.

Some people cut back on their desired wish list on properties they never intend to sell. They build homes that they intend to live in until the day they die and yet they cut back because they might overcapitalise.

So whilst you may have heard horror stories about the pitfalls of Overcapitalisation, it is only an issue if you intend to sell your home immediately. If you’re not looking to sell within the next 5 to 10 years then chances are it’s not something you need to lose too much sleep over.

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