Don't over-capitalise

In today’s weak property market an increasing number of individuals are opting to improve their current premises rather than trying to sell and then upgrade to a more suitable property.

While investing in expanding or improving your home may indeed be a sound financial decision, the risks of overcapitalisation are much higher now than at any time in the past five years due to house price deflation, warns Rob Stefanutto, of Lew Geffen Sotheby’s International Realty.

Says Stefanutto: "The years of whirlwind growth in house prices have allowed people to overspend on finishes for investment homes and get away with it. But these days I cannot stress enough how necessary it is for people to assess the value of the property in terms of the suburb in which it is located before making decisions on where within the house to spend their money.

"There is a good chance that it will take several years to recoup the investment, so make sure the upgrades are well-considered and well-executed and will survive the test of time. The policy of buying the worst house in the best suburb still rings true, especially with improvement and investment in mind."

'Invisible' improvements

He points out that often the best return on investment when improving a property can come from upgrading its more invisible features such as wiring, plumbing, roofing and other structural upgrades. In many cases these are vastly more expensive than the trendy and more visible finishes like Italian kitchens and creative décor, but will add to the longevity — and therefore capital value — of the property.

"It can cost you almost ten times more to put a new roof on your house than it does to redo your kitchen, and while many will choose to rather spend the money on the kitchen, true value can be put on a home with a newly redone roof or wiring," he points out. "Stylish finishes will not create longevity; if you haven’t fixed the important things there is a chance your new Italian kitchen will have to be ripped out in order to fix bad wiring.

"Invest in these important long-term structural improvements and ensure you then stay in the property for at least five years — the length of time it is likely to take to make a profit from your investment in this slow market. All upgrades need to last at least five years or more and should offer return on investment after the five-year period is up."

Security a sound investment

He points out that, besides the bigger projects like roofing, value can also be added by installing proper security systems, carports and good plumbing. Replacing a geyser for R3500 or installing instant hot water systems at R4000 each will offer the next owner savings in terms of space and electricity and improve the property’s value. He also recommends buying good quality paint that can maintain its look for over seven years, rather than having to re-paint much more often with cheap paint.

"I know of numerous home owners who have substantially over-capitalised their properties in the past few years, carried away by the fanciest features in home decorating. They were trapped in a mindset that they would always be able to recoup their investments thanks to price escalation. However, people’s mindsets have hopefully changed as the timeframe for actually making a return on one’s home has lengthened considerably," concludes Stefanutto.

Article by: Carrie Holland - www.iafrica.com