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Renovate wisely in current market

We all want our homes to be comfortable and convenient, if not the home of our dreams then at least one with the features we want and decorations to our taste. When the property market is strong, as in recent months, the temptation is to spend on improvements and renovations, assuming prices will continue to rise and money spent would be recouped if the property was sold.

But, while it is always tempting to put in the latest bathroom or kitchen, it may not be the best option.

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. While most investors are wary about overspending and are wise to avoid this trap, that is not always so with improvements on our own homes.

Of course if you plan to stay there for many years, spending money which may not be recouped in the short term is not such an issue. But 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. It was encouraging news, but REIV predicts a slowing in property prices later this year, so 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. A good yardstick is the local median price, which can be checked out here. 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. If you’re wondering what adding an extra bedroom could sell for, click here to browse median prices by size.

Consult a real estate agent for an appraisal of your home and ask his or her advice about your plans – would they be a wise move, would you get that money back if you sold? If the answer is no, the time, stress and cost of renovating are best avoided.

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