Under or Over Capitalisation: What You Need to Know [Updated November 2023]

Under or over capitalisation is an important consideration for both new home builders and renovators alike. Spend too much and you might never make that extra money back, but spend too little and you could cost yourself tens of thousands of dollars in the long run!

What is Under and Over Capitalisation?

Under Capitalisation

Under capitalisation of a property generally occurs when renovators don’t spend enough on a project and it ends up half done, or shoddily done, and becomes very difficult to sell. Often this occurs when there is a lot of unskilled DIY work undertaken or when people don’t take into account the desires of other buyers in their area.

To better understand this, consider the following example:

• Bill and Jenny build a home in a new estate situated near a school with plenty of parks and playgrounds nearby. They opt to save some money on the cost of building by going with a smallish three-bedroom home. The market rises and they go to sell, however they soon discover that people looking at properties in their estate are only interested in four-bedroom properties and they struggle to attract a buyer, eventually selling their property for considerably less than they had hoped for. Unfortunately in their attempt to save money they undercapitalised.

Over Capitalisation

Over capitalisation, on the other hand, is when you improve a property beyond its resale value. Usually this is done by spending too much money on renovations. And you’re then unable to recoup these when you sell the home.

To better understand this, consider these this example:

• Tina and Phil have bought in the same estate as Bill and Jenny but they have gone the other way. They spare no expense building a massive six-bedroom home with a study and home theatre. They purchase the highest-quality fittings at considerable expense. There is no doubt that their home is magnificent! However, when they go to sell they discover that their property is out of the price range of the people that want to move into that area, and those that can afford their home don’t want to live in that suburb. They have overcapitalised and will not get anywhere near what they originally spent on their home when they sell.

So how do you avoid these pitfalls?

Under or Over Capitalisation

Value Your Property

The first step to ensure that you don’t under or over capitalise on your property is to know its value. Understanding how much your property is worth in the current market, how much it’s changed in value, and how much other properties are selling for in your area is vital. This is especially important in an expanding market, like we’re currently facing.

Once you know how much your home is worth, you’re in a good position to understand how much you can spend on it without slipping into the mistake of over capitalisation.

Keep Your Timeline in Mind

When it comes to under or over capitalisation, it all comes down to your timeline. By that what I mean is, how long you intend to live in your home.

10-20 Year Timeline

For example, let’s imagine that you’ve built a new home now that you are reasonably sure you’re going to stay in for the next 10 to 20 years. Chances are that even if you’ve overcapitalised a little it won’t be a big deal. The market will have caught up with you in that time. In fact, you’re probably better off having spent a little more than a little less.

Five to 10 Year Timeline

However, if you only intend to stay in your home for five years or less, then you really need to approach things more cautiously—and this is where professional advice is important.

We have the skills and the experience to give you very sound advice on your level of investment.

For example, regional areas tend to be considerably more sensitive to under or over capitalisation than metropolitan areas. However, having said that, there can be a significant difference from suburb to suburb. Fortunately, we have the knowledge of which suburbs will suit you and your plans best.

Hire Experts

It’s not just about location, the amount that you invest or the time that you plan on living in the home that can affect under and over capitalisation. It’s also about where you invest the money in your project. For example, if you spend extra on an outdoor living environment in South East Queensland, chances are this won’t represent overcapitalisation as these additions are valued and buyers are willing to pay for them. On the other hand, perhaps a fireplace (at least indoors) isn’t as important.

Hiring experts who can give you the right advice for your area, your home, and your needs will save you money in the long run. In addition, they can help you make good decisions, draw up excellent plans and ensure your layout is functional. Your expert will also be able to give you advice on whether you should ‘renovate or detonate’ if this is something you’re still trying to decide.

Carina Heights New Luxury Home: This Carina Heights new luxury home design was intended to serve both the current and future generations of the family. This was done by being flexible enough to meet their ever-changing needs and to stand the test of time in terms of both functionality and style.

Working with Dion Seminara Architecture

At dion seminara architecture we are acutely aware of what potentially constitutes an under or over capitalisation on a property.  We can advise you, just as we have advised countless other clients, accordingly. We have an intimate knowledge of materials and construction in addition to market trends, and we can use all this knowledge to ensure that your project avoids the pitfalls of investing too much or too little in the wrong areas.

So if you want to avoid the risks of over or under capitalisation call us today to discuss your project needs.

Call us today and let us discuss your project needs in detail.