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The Downside of Downsizing

Veronica Morgan shares her thoughts on the downside of downsizing. 

Downsizing can be an exciting challenge as most people do it when their kids have left home and they want to free up some of the equity in the family home.  However this wasn't the case for Helen and Tom, who needed to downsize for financial reasons.

Nevertheless, they were in a strong position, having enough equity in their home to give them a healthy budget.  As long as they were prepared to compromise, they wouldn't have to move to a new suburb.  The biggest challenge with downsizing however, regardless of the reasons behind the move, is that everything will seem substandard compared to what you are used to.

Usually downsizers want a smaller home, but this is often easier said than done, as it is hard to come to terms with having less belongings in a more compact space.  It can be quite confronting when you actually stand in a smaller bedroom, for example, and imagine yourself living there.

Some downsizers are prepared to renovate in order to get a bit more space while reducing the overall value of their primary place of living.  But this can be a trap for people who have never renovated before as building costs can easily get out of hand. 

When you find a likely renovation candidate, the question to ask is: can you live in it as it is?  If, for instance, the kitchen and bathrooms need urgent renovation, my next question is: are they located in the right spots in the house?  If not, you are throwing money away to renovate them without reconfiguring the rooms, which will require a much bigger budget. And more risk of budget blow out.

People worry about overcapitalising on a property.  But they rarely worry about undercapitalising, which can cost you just as much in terms of lost capital growth and wasted renovation dollars.  If not enough is done to the property, or the standard is not up to the level that local buyers demand, then you could be better off to do nothing.

Helen and Tom were particularly interested in capital growth as they were seeking to regain their previously held position on the property ladder.  Most downsizers are not so concerned with this aspect of property ownership, but I encourage everybody to buy with a view to capital growth, regardless of stage of life.

After our property search, Helen and Tom found a large renovation project in their favourite area.  They loved the location of this house and the land size but it was really a project that was beyond their scope.  Without the funds to rectify the major problems this house had, they were not going to get the leg up the property ladder that they needed.  It looked like they were finally willing to compromise - but what they were compromising on would have had a greater impact on the value of this investment than if they bought a smaller house where all the rooms were in proportion, with a good flooplan and an architectural style in keeping with the area.

Which brings us back to the main challenge downsizers face: moving down the property ladder without feeling like you are going backwards.

Veronica Morgan also blogs on her website: http://www.gooddeeds.com.au/buyers-tips-and-the-property-market.


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