What does overcapitalising mean? You may have the heard the word before. “Be careful not to overcapitalise” or “that property is overcapitalised” but what does it mean?
You may have the heard the word before. “Be careful not to overcapitalise” or “that property is overcapitalised” but what does it mean?
In simple terms it means spending too much money on extending a home in a suburb or locality where the rest of the homes are worth much less than your finished product. If the average price in that area is say $600,000 and you have spent $950,000 building your two story mansion you have overcapitalised for that area. If I am a buyer looking in the $950,000 range my first port of call will be a suburb or location where there average price might be between $800,000 and $1m.
Of course it may be that many years in the future you will be able to get your money back but the house I bought will now be worth perhaps $1.3m or more.
That doesn’t mean you shouldn’t reinvest in your current property by adding another story or perhaps a room or two on the ground floor. Just be mindful that when it is finished the end product and end value sits comfortably in the suburb.
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