Avoiding Overcapitalisation: any rules of thumb?

[Ergophobia]

I am planning on knocking down our PPOR to build our dream home.

We live in a beautiful street, opposite a nature reserve, but the suburb has a low median (540k according to reiwa).

We bought for 575k in 2010 and the place is a single story 4x1 with carport. We want to build a nice 2 story 4x2 with double garage for about 600k but im worried about overcapialisation.

We plan on moving back over east in 5 to 10 years and convert the property to an IP.

My ultimate aim is maximise equity and rental yield.

Are there any rules of thumb about house to land value?

How would I go about researching our street to make sure I dont go overboard?

 

[HotRod]

Work out the land value of your vacant lot and then look at a new property on a similar sized lot in the area. The difference in price is your maximum build cost. Anymore and you have overcapped.

 

[Ergophobia]

Work out the land value of your vacant lot

how do I do that?

 

[tobe]

overcapitalising and dream home.
Cake and eating it too.

rent your dream home, or build it in a suburb that can sustain the capitalisation.

If you build in a diferent area, remember that you have overcapitalised, and dont expect the banks valuation to agree with the cost of the home.

If you have the choice on whether to overcapitalise or not, then you have a choice as to the opportunity costs of your investments. If you can continue to work a bit longer to offset the overcapitalising, and you are happy with taking the gratification now rather than waiting for it, go ahead.

Otherwise slap up a couple of units on this block and use the increased cashflow to rent your dream house until you retire and move east in 5 years time.....

 

[Ausprop]

how much woud the rent really change? and it sounds like you will be struggling to create equity - more like lose it. You would do better to buy a vacant block in a higher priced suburb and build and get a developemnt margin in the process.

When you demolish you need to be sure of how much value you are destroying vs how much you are creating

 

[tobe]

You could take a conservative approach and take the vacant land value from your council rates notice, or you could get an estate agents opinion, or see if there have been any recent sales of vacant land in the area.

Once you have the vacant land value, subtract that from the sale price of a recent sale of a double story house with garage etc and then you will have the approximate figure on how much you can spend demoloshing and building new.

I guess if your happy not to watch the properties value over the next five years, you could take a stab at what you expect the value to be at that time and use that figure minus the land value for a spending limit. This approach has holes all though it, (not the least of which is how to estimate future capital growth) and doesnt take account of opportunity costs for the 5 years until you move, but its probably a better justification than just opening the checkbook....

 

[geoffw]

Not so much on capitalisation, but on rental yield. If you can design your house in such a way that it can be easily split into two rentals your rental yield could be increased by a lot. One end may be able to be isolated, or one story.

 

[Ergophobia]

Not so much on capitalisation, but on rental yield. If you can design your house in such a way that it can be easily split into two rentals your rental yield could be increased by a lot. One end may be able to be isolated, or one story.

great idea, thanks

I was thinking of including a GF out the back with its own carport, but hadnt thought of splitting the main residence.

 

[Ergophobia]

how much woud the rent really change? and it sounds like you will be struggling to create equity - more like lose it. You would do better to buy a vacant block in a higher priced suburb and build and get a developemnt margin in the process.

When you demolish you need to be sure of how much value you are destroying vs how much you are creating

I would, but we bought this place as a lifestyle choice, the bushland and river on the doorstep will make a great playground for our 2 yr old boy as he grows up... Im not looking to make a killing on it, just not to loose a motza.

 

[Aaron_C]

You can easily overcapitalise unless your property/land has something different about it. This would mean something like being beachside/having views or having a lucky number (like 88). Without one of these major factors, I wouldn't try spending up big on the property if investment is your primary goal.

 

[Ergophobia]

You can easily overcapitalise unless your property/land has something different about it. This would mean something like being beachside/having views or having a lucky number (like 88). Without one of these major factors, I wouldn't try spending up big on the property if investment is your primary goal.

20 minutes from the city with views over bushland to the city... its a beautiful spot

I was just looking on "on the house" at property price estimates for my street, and there is nothing over 1M, so I think ill scale back my budget to 500k putting the development at just over $1M total cost.

Geoff's post has me thinking of designing the place so it can be easily converted to dual occupancy later when I want to rent it out.

I’m thinking main living areas, kitchen and bathroom downstairs with a parents retreat up stairs. Ill put kitchen services (plumbing, gas, drainage) into a study nook up stairs so it can be easily converted to a kitchen at a later date.

perhaps a spiral staircase that can be removed and the void sealed up to segregate the top and bottom floors. Upstairs on separate electrical and plumbing circuits from downstairs so separate metres can be installed later.

 

[Aaron_C]

Honestly I don't like the idea of a dual occupancy unless you can design it well. It will devalue your property if done poorly.

 

[Ergophobia]

Honestly I don't like the idea of a dual occupancy unless you can design it well. It will devalue your property if done poorly.

That is the key

 

[HiEquity]

I agree with Ausprop. On those numbers in Riverton you would be definitely over - you will never get that money back - maybe half of it?

BTW Aaron will know better but unless the zoning allows you to split the block the council won't let you add a GF to rent separately. This is Perth - we don't do that sort of thing around here!

At least not formally...

 

[Rockstar]

We bought for 575k in 2010 and the place is a single story 4x1 with carport. We want to build a nice 2 story 4x2 with double garage for about 600k but im worried about overcapialisation.

So a 4X1 with carport is worth, say, 200k? And, say, 20k to demolish? So that is what you're losing in simple terms if my guesses on value are correct let alone the disruption to your life for 6 - 12 mths. Costs of moving out somewhere and moving back.
These emotional decisions can set you back a few years - but it's your PPOR so you have the call.

Sorry for being objective but you are undoubtedly overcapitalising IMHO.

All the best,

 

[Melbournian]

I am planning on knocking down our PPOR to build our dream home.

We live in a beautiful street, opposite a nature reserve, but the suburb has a low median (540k according to reiwa).

We bought for 575k in 2010 and the place is a single story 4x1 with carport. We want to build a nice 2 story 4x2 with double garage for about 600k but im worried about overcapialisation.

We plan on moving back over east in 5 to 10 years and convert the property to an IP.

My ultimate aim is maximise equity and rental yield.

Are there any rules of thumb about house to land value?

How would I go about researching our street to make sure I dont go overboard?

every thought about just renovating and adding another floor totally prefabriacted. there are companies that do that like modscape and prebuilt in australia. i know of a penthouse built on top of a east melbourne apartment block that was lifted up and installed.

 

[Ergophobia]

Yes I ran some numbers on a second story extension... Might be a better option to just do a reno and build the dream house when we move over east in 5 years.

 

[marg4000]

Why not have a chat to a couple of RE agents in your area.

Describe what you plan to do and get their opinions of how much it would sell for.

Take away the value you would get if you sold as is, then you have your maximum budget.

Very "back of envelope" stuff, but should give you an idea if you are on the right track.
Marg