How To Not Over-Capitalise on a Property

When it comes time to do a renovation on a property it is very important not to over-capitalise and waste money on that property. So how do you avoid over-capitalisation and what are the best ways to spend your money.

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0:00 – Introduction
0:40 – Ben’s worst example of over capitalising
4:12 – Over-spec’ing a home and lowering the debt position too much
6:14 – You generally need to renovate your property every 10-15 years anyway
7:26 – An example where Ben isn’t over-capitalising
9:23 – How to avoid over-capitalising
12:10 – You need to look at the end result of your renovation and understand the end goal
14:41 – The issue with over-capitalising
16:25 – Talk to your property manager
17:00 – Having a clear short and long term strategy is vital
19:30 – Bens’ constantly making mistakes and learning

Transcription:

Ryan 0:00
when it comes time to do a renovation or to build a property it’s very important not to over capitalize on that property especially in the current market and so today i have with me ben everingham buyer’s agent from pumped on property who has himself over capitalized before and obviously learned from that experience and works with a lot of clients on building their own properties or doing renovations or building granny flats so he has an insight and a wealth of knowledge into this department and what over capitalizing is and why you shouldn’t do it

Ben 0:32
yeah so over capitalizing is something i’ve unfortunately done more than a handful of times the worst example of me over capitalizing was buying a piece of land in a regional part of new south wales and then building over here and then building brand new and expecting to make $100,000 profit in six months and instead losing $40,000 this was at a time in my life and i wasn’t earning much money either so it really stung me that year

Ryan 1:06
i remember you saying it was i worked six

Ben 1:08
six months a year for at least six months that you’ve absolutely nothing so yeah like over capitalizing is something so easy to do so what you know how do we do this we break it up into some scenarios or how do you think we should

Ryan 1:21
yeah well i think there’s a bunch of different examples of over capitalizing let’s start with the regional one because i think that is really important when it comes to purchasing property doing renovations doing new build property it’s important to look at the area and what properties have sold for in the area and often over capitalizing means look like doing something for the area that in order for your numbers to work out you have to sell your property for more than any property in the area has ever sold for ever

Ben 1:52
it’s so true because there’s really two parts to this there’s the area and then there’s the actual property itself so the huge mistake that i made when i did this it was a regional market called kyogle there’s literally like five or 10,000 people living in this yes

Ryan 2:08
it’s not very big at all it’s kind of west of byron bay

Ben 2:12
west of byron bay and what i found out that i didn’t know is you know i just i trusted someone’s word that there was an easy $100,000 there rather than doing due diligence that by that point i knew i needed to do i just didn’t do because i trusted this person and you know the way that i over capitalized in the area is that when i started to look at the sales history data after it was too late to get out i realized that literally over the course of the last five years only 6% of the properties have sold above what i was asking for and in fact that what i was asking for was $40,000 below what the property had cost me to create so i was really caught i’d completely over capitalized rather than being in that sweet spot and middle of the market where there’s the most buyers i was in the very premium end and then the fact that i was in a regional market where literally less than 1% of the people living there could afford to buy what i’d created it just put me in this really niche market where i didn’t have much wiggle room and that’s a dangerous

Ryan 3:12
yeah and that means your property can also stay on the market for an extremely long period of time as

Ben 3:17
well took me 270 days to sell it for 40 grand loss this thing that for a moment like waking wake out just getting like a secret sacred in the stomach it was horrible and not having any way to get out of it until it sells you just have to wait for it and i had to leave it vacant because for someone to get it as a first time buyers grant from me we tried did end up selling it to someone who who get the first time buyers grant it needed to be vacant possession so i couldn’t get any rent on the data and

Ryan 3:47
so then you just bleeding cash the whole

Ben 3:50
time in a time when i couldn’t afford to as well like you’re costing me 400 bucks a week and harder and i was making you know 14 $100 a week after tax at that time

Ryan 4:01
yeah and so that’s obviously an extreme example

Ben 4:04
of over capitalizing that just don’t be a dumb ass like me type of thing more than over capitalizing

Ryan 4:10
i guess another one i’m sorry to pull from all your mistakes was you built what you thought would be your dream home

Ben 4:16
yeah he didn’t thanks i have two hours of content right now just smashing

Ryan 4:23
smashing bed day but that’s the thing i think you thought it would be your dream home so you split it up in a way that you probably wouldn’t have for the rental market and then decided that given the orientation of the property and just not having enough sun it wasn’t the dream home and you you found something so much better that you ended up moving and then turning it into a rental property

Ben 4:46
yeah which i still own is a few lessons there like cuz i thought it was gonna be my dream home i buried a lot of cash into it so the debt position on it’s quite low you know i was expecting to live there for a long time and raise my kids there’s so you know i was talked into paying off a fair bit more of the debt than i wanted to buy my mortgage broker i then as ryan said like instead of just doing your standard property that was well suited for that site i did higher ceilings i did better quality finishes i did much bigger rooms ended up like a lot of things like really custom stairs that custom pool yeah like all sorts of things man and you and i had been there a bunch and worked out there a bunch and it was a really nice place on a tiny block of land facing completely the wrong direction for the sunshine coast so again huge lesson like are probably buried at 50 grand more than i was supposed to there but luckily started a bunch of my neighbors and they actually started to sell out at premium prices so in terms of the overall deal it will actually work out quite well like they will actually be about 150 to 200 grand net profit in that deal yeah but i still completely over capitalized because the 50 grand that i put into it isn’t part of that that’s just the market moving what that 50 grand represents is a 50 grand loss in actual profit that i could have made just from doing it how it needed to be

Ryan 6:12
yeah and so you’re also had the issue when you over capitalized in terms of the specs as well in that when you’re having someone rent the property obviously they’re not going to take as good care of it as you would and it tends to lead to you needing to do a renovation on your property every 1015 maybe 20 years and so spending too much money that you’re just going to have to replace in 10 or 15 years time can be an example of over capitalizing in the rental market and not getting a return on your investment

Ben 6:44
because that makes me sad because i wasn’t even thinking about what you just said that’s the reality you know i’m going to sell this property either later this year or next year so my plan is to exit but even that said i’m still gonna have to like completely repainted before i do that

Ryan 7:00
you have to repaint it before you sell it

Ben 7:02
yeah i just feel like you know me living in there for a year plus these tenants living in there for a couple of years i’m going to be forced to repaint the inside of the property which is another five grand

Ryan 7:12
yeah and so that’s definitely something to think about when it comes to over capitalizing is that you want to look at what am i actually going to get for this what rental return am i going to get for this or what capital appreciation am i going to get for this and let’s contrast that to the new build that you’ve got at the moment where i feel like you’re not over capitalizing

Ben 7:33
if i’m not

Ryan 7:35
maybe there’ll be a future video where we talk about this one

Ben 7:39
i don’t feel like

Ryan 7:40
in terms of the majority of the build it is mostly just like spec housing new build housing and you’ve made some minor changes and spend a bit extra

Ben 7:51
yes so on this particular property i know what it is and i have learned my lessons like i laugh about all of these things but the last two properties that i’ve built have been very very different and so what i’m doing now knowing that like ryan said the properties i’m building the armor to hold for 15 to 30 years in half to renovate is i’m just doing something that looks great for the current marketplace without over capitalizing like i’m just doing instead of the two pack kitchens i’m just doing laminate which saves quite a bit of money instead of like the really big you know tiles that you see in places i’m just doing standard sizing tiles instead of like the really nice plush carpet with really nice underlay that you know instead of the extra square meterage just to make it bigger because i wanted it to be bigger i’m doing what the market wants and while those little things i’ve just mentioned might not sound like a lot you know that could be 30 or 40 grand difference on them total costs for build once you add them all up yeah and that’s money that you’re literally throwing down the drain because it’s not adding any value in the current rental market and it’s not actually adding any immediate value to the property because the value is the way that they’re doing it now is how big is the floor plan how big is the you know you know what’s the total average level of the build and what’s really the site cost based on comparable sales as opposed to you know walking through and looking at those tabs and going oh they’re nice taps i’m glad to spend $3,000 extra

Ryan 9:22
so how would you like how would people avoid over capitalizing

Ben 9:27
really good questions so the way that i do all of my stuff now is before i even start looking at a property i already know which market which suburb i want to buy in and then i look at every single sale with a fine tooth comb in that particular market place over the two years before and what i’m actively looking for is to establish what a line in the sand of market value for the suburb is and where the median is or where the average is for the suburb so i’ll look at what the average is for the suburb and then i try and within the suburb then break the suburb into effectively three tiers, the cheap at the middle tier, and the expensive tier. And from within those three tiers, I find out what I want, which is generally now the middle to the upper tier. But my strategies into own 50 properties, it’s to learn three really good ones out, right, so I’m looking for quality stuff, not just stuff. And then from there, once I’ve established what market value in the suburb looks like, and market value for the particular type of property I want in the suburb, and that’s as easy as jumping on realestate.com. It’s

Ryan 10:32
not hard going through says, Go through sales history,

Ben 10:35
look at the sold section of realestate.com. And just you know, then, then just slowly work your way through the market to re educate yourself. And that really doesn’t take a long time to do. And then from there, I then go out and I buy the property at the right value for the suburb. And then I look at that particular property. And the reality is anything more than carpets, paint job and a bit of high level landscaping is really in most suburbs in Australia right now not going to get a rental premium. The market just wants a clean, livable place. It’s in low maintenance, nice condition. Yeah, and that’s a big lesson that I’ve learned to like, you know, a lot of us, you know, buy properties, and we want to make our investment properties feel like places that we would live in. But the reality is like redoing a kitchen, redoing a bathroom, replacing a roof, or, you know, those big ticket items doesn’t actually make a lot of short term sense, which is why like my rule of thumb now is, if I’m not adding being value to the property to get a rate like to release equity or create value for the property,

Ryan 11:41
yeah, or

Ben 11:42
I’m not doing it, to clean up the property to sell it, I pretty much just do the basics now, because I, you know, I could put 40 grand into doing everything, and only get an extra 50 bucks a week in rent. Or I could put 10 grand into paying carpets, some landscaping and stuff and and get 30 bucks a week back in rent. And that’s how I see everything now.

Ryan 12:04
So I think what I hear you saying is that, you have to look at the end result of what you’re going to get. And you have to look at different scenarios of Okay, if I invest this much, and if I, if I do the property to this back, how much am I going to get whether you’re aiming for more rental return, or if you’re aiming for more equity, you have to understand the end goal before you actually start your renovation or before you start your build, or granny flat or whatever it may be, you need to understand, okay, if I go ahead and do scenario a, where I spec it out completely, what’s my result going to be if I do scenario B, where I do a middle tier renovation or build? What’s that going to be if I do option C and go super cheap? What if I do nothing? What’s that option? So playing out the scenarios, and then choosing the scenario that works best for you, given your goals given your current cash position giving what return on investment type you’re looking for. That’s how to at least begin not over capitalize on it. And then it’s about staying within that budget and not getting emotional when it comes to building which is probably a whole nother situation. Yeah, the

Ben 13:18
same, like Forgetting Sarah Marshall, where he’s teaching the guy to surf. And he’s like, just do less. Yeah. And the guy’s like, pushing up. And he’s like, No, do less. And then he like just lies on the board. He’s like, No, you’ve got to do more than it’s like daddy’s property, right? It’s kind of like, it’s like a martial art. It’s like not do less. Now, but you’ve actually got to do something as well, like there’s this really fine line. And nobody knows where the professional knows where the line is only because of experience and like me wasting money. The amateur doesn’t know where it is in generally, like audio goes in and pays way more for things than you have to. And so there’s this little art form, it’s like a satellite, and it’s just sort of, you know, really, if you’re in a premium marketplace, where all of the properties are selling for $2 million, then obviously, when we’re talking about a $10,000 renovation, that’s not going to cut it there if you’re getting if you’re looking for over 1000 bucks a week in rent, but in a lot of other areas where you know, you’re buying properties worth 200k up to 800 grand, you know, people that are renting those properties from you generally, you know, obviously some of them will rent for a premium in their in perfect condition. But the reality is the difference between it being Primo, Primo and just good enough for most people is is very subtle.

Ryan 14:39
Yeah. So I think the issue with over capitalizing is that the difference for a potential tenant, or the difference for a potential buyer can be less than what the cost is to actually make it higher spec so you could invest significant amounts of money and not get the rental return from it. So if we’re talking about the difference between a 10 grand and a 40 grand renovation you need to look at the difference between those two scenarios and to say okay i’m going to spend an extra $30,000 what am i going to get for that $30,000 so don’t just look at it overall if i invest 40 what am i going to get but you actually have to think about okay well i could just invest 10 and i would get x percent return but if i invest an extra 30 grand

Ben 15:24
what will that 30 grand get me because i remember years and years ago right i bought this property on the central coast and when i first bought it i repainted it or re carpeted it and then six years later when i was coming time to sell i had to do all of that stuff again the house they’re gonna trash this is trash so i obviously had to do it but even before it got trashed i’d gone and inspected it like four months before that you know which is the first time i’d seen it in three or four years and it still needed to be done again and i was i was just kind of like what was the purpose of that you know what i mean like that’s kind of where i was at almost i was like you know yes you want to do the bare minimum to keep the property in the best condition possible but i did that work for myself like i thought it needed to paint job i thought it needed to carpet job but that was just my personal preference there was actually no reason why in that current market it wouldn’t have changed the rent by $1 if i hadn’t hadn’t have not spent that seven or eight grand up front on it

Ryan 16:22
so so i think another thing is if you’re not sure what’s going to get you the best bang for your buck then talk to your rental manager

Ben 16:29
talk to your property manager now to straight up

Ryan 16:31
they’ll say okay i recommend you do this if you do this you’ll likely get this much extra rent they are a great source of information for the market and know they’re not perfect they’re not going to know everything will get everything right so you need to take their advice with a grain of salt and put your own investment hat on and your own layer over that but that can be such a good person of expertise to say okay if you do this you’ll likely get this result

Ben 16:59
you know one thing that we haven’t touched on yet he’s strategy right so with every single property that i buy i have a clear strategy for that property and one of the strategies is obviously the short term to get it rented out but most of the time i have a long term strategy which is pretty simple it’s either i’ll hold it forever or i’m holding it for a period of time to sell it so cause i’m you know because i have that clear plan for every property i’d buy and because i’ve had these experiences or watch these videos on other channels and listened to other people’s podcasts as well i just i have a pretty clear idea about what works and what doesn’t for me now and that’s that varies between every property that i buy like some properties are worth over specking because i’m trying to attract a premium rent and to me it’s worth it even though i’m gonna hold it long term and other properties just aren’t and i think having that clear plan in place for the property like like i said if you just want to increase the rent return then you just do this but if you want to release 100 grand of equity then you’ve got to do all of this and if you’re getting it ready to sell then you can sell it at the bottom of the marketplace as is or maybe after talking to a couple of sales agents there’s potential to do that much work to it to get a bigger result and i think you know it’s really about understanding the marketplace in the sold section talking to your property managers talking to the sales agents talking to your mortgage broker about what you need because the biggest mistake i think most people make is they want the properties they own to be places that they would personally feel proud to own as opposed to these are businesses and the business doesn’t require renovation right now so just don’t waste the money on it

Ryan 18:41
yeah and you have to come back to as ben said your strategy and what your end goal is the end goal of investing in property generally speaking it’s a vehicle to fund your lifestyle whether that be through equity whether that be through cash flow you likely have a financial goal for that property so come back to that financial goal don’t get caught up in making it look good and being proud of it because ultimately you’re not going to live in it you know someone else is going to live in it and trash it and you know you’ll have to replace it and you don’t get to enjoy that so instead spend the money better so then you can afford to do that sort of stuff to your own home which you are going to live in also that you can afford to do the things that you want in your lifestyle

Ben 19:24
so we’re going to have a look at a property right now that i bought three years ago in brisbane where just 10 case in the city to brisbane now we’re going for a quick drive and this particular property right i was going to build a granny flat on it i’ll let the current tenant now about nine weeks ago that that was my intention i lost that tenant i decided that i didn’t want to buy put a granny flat on it straightaway so i’ve lost this really good quality tenant that was renting the property for for 20 a week i’ve now just put a new guy in the property because my manager told me that i needed to renovate the property which i do like It needs to paint some carpet, it’s very tired. Because I know that I wanted to do a proper Renault life by proper right now. I mean, I want to do the kitchen and I want to do the bathroom and I want to do a lot of it at once. I know that that’s coming up in the next few years, there was no point me paying painting it today. And then having to do it again. I’ve just had nine, nine weeks of vacancy, I’ve got rent on renting their property now for 350 bucks a week, and I’m not building the granny flat, you know, like I’m constantly making these mistakes and learning things as we go. Like there’s what I really want to get through to people is just because Ryan and I get to do this every day doesn’t mean that we always make the right decisions. Like it is just constantly learning and growing and responding to the market. And I’ve learned a huge lesson there like one, if I’m not 100% certain about what I’m going to do, don’t lose a great tenant for it, too. If I hadn’t had a clear plan for that particular property, which wasn’t sort of, hey, we’ll renovate it next year and build a granny flat this year. And just hope it all works out. This wouldn’t have even happened like you know what I mean? Like I could have approached this in such a better way. And so, you know, in the old days, if my manager had said to me Hey, Ben, you know, based on your condition of this property, it needs a paint in the carpet now I would have just rushed out and spent seven grand but always prepared to lose maybe two grand of rent three grand of rent today knowing that I was going to have to replace all of that painting and carpeting again next year when I redo it so for me it’s like a short term pain for like the longer term bigger picture but i think is that a weird way of sort of saying full circle that you know, like

Ryan 21:44
example we didn’t over capitalized because you know, you’re gonna have to rip it out in a year or two.

Ben 21:49
That’s exactly what I’m trying to say.

Ryan 21:52
That was a very real thing. So we hope that this has been insightful and helpful obviously we don’t want you to over capitalize on your property and spend money when you don’t have to we want you to achieve financial freedom or whatever your property investing goals are as quickly as possible. And obviously avoiding over capitalizing can help with that. As we can see Ben’s Ben’s made a few mistakes in his time. None of us are perfect. That’s it from us today we are almost at this property which we are about to inspect so I will finish the episode there. Thanks so much for tuning in. Don’t forget to subscribe to the channel, or check out Ben’s YouTube channel as well. He does a lot of great content over there. I’ll link that up in the description down below. Otherwise, until next time, stay positive

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