These are just some of the accessories you might find in a young man’s car. Initial cost of car – $10,000. Cost of accessories – $15,000.
Now, this is where it starts getting interesting. It would be safe to expect a buyer to pay $25,000 for this babe magnet, or even $20,000, right? Wrong. This machine has just suffered a severe bout of overcapitalisation.
What is Overcapitalisation?
Well, it’s when someone goes crazy with expenditure and not a faintest clue whether they will be able to recoup their money. Ever. It’s okay (somewhat) when we are talking a few thousand dollars to enable a young man/woman to live out their dream.
The worrying thing is that people are doing this with their houses
Where at stake, is hundreds of thousands of dollars. But that’s okay; if you’ve got an endless supply of the printed stuff! Well, do ya?
If you don’t, then you need to be very careful not to overcapitalise when it comes to building a home. Like they say, horses for courses. It needs to be fit for purpose.
And you need a way out. That’s it.
Have an exit strategy
What will you do if things turn to custard? You lose your job, become disabled, lose a partner. Do I really need to go on? When the proverbial hits the fan, you need to jump off the plane.
And your parachute will only work if you haven’t overcapitalised. Otherwise, you are a dead duck (figuratively speaking of course).
But won’t my house go up in value over time
Of course, it will. But, remember it can still go up in value without overcapitalising its true value. Go on, splash out your hard earned dosh if you must, but just be a tad smart about it.
Summarise, shall we?
- Make sure you know the resale value of your project before you start
- Don’t spend your hard-earned income on frivolous accessories (unless you are absolutely sure of recovering this cost)
- Your parachute is sure to fail if you’ve overcapitalised
Review the eventual cost of any existing or upcoming projects. Don’t live in denial, be honest with what the true resale potential is, at any given time. Review sales in the area.
Get a professional valuation if you need to. Don’t be a boy racer and spend $15,000 on a $10,000 car… with absolutely no hope of recovery. Ever