Players of the property game know that capital growth, or subsequently equity, is the main reason why people invest in property. For those of you who don’t know what capital growth is, in simple terms, it is the value of a property over a period of time. For example, if you purchased a property in 2003 and were to have it re-valued, or were to sell it in 2011, the value of the property will have increased. The difference between what you purchased the property for and what it is now valued is the amount of equity available in the property. This equity can then be accessed to purchase other investment properties or in some cases subsidise your lifestyle. On average, properties will double every 7-10 years.
If you’re not looking to wait 7-10 years, to see substantial returns on your investment property, there are strategies that you can implement to speed this process up. Part 1 of this blog will review the approach of renovating and buying at a discount whilst Part 2 will look at using strata title, subdivision and purchasing off the plan.
All of these strategies will give you access to equity in the property almost immediately.
When you think of adding value to a property, renovating is almost always the first thing people think of. The trick in this particular strategy is not to OVER CAPITALISE. In other words, don’t over spend on items that will not increase the value of the property substantially. Concentrate purely on cosmetics, for example painting walls, new carpet, new blinds/curtains, fencing, and simple landscaping. A lot of people spend big on bathrooms or kitchens, this is not necessary so long as it is clean and tidy. Don’t spend big on tiles when you can put vinyl down instead, be clever and adopt the mantra of “less is more.” Do not treat the property as if you are going to live in it, this will only cost you more money!
The important thing to remember when renovating is that the person you need to impress, above all else, is the property valuer. The improvements made need to be obvious, so make them stand out. Also take into consideration that the valuer does not always enter the property so any adjustments you can make externally (painting window frames and gutters in bold colours, landscaping etc) is a must.
When putting an offer in on a property always ask for “terms.” This involves writing into the contract document that you have approval to access the property prior to settlement; this will give you time to do two things:
- Begin renovations. Aim to have all renovations completed prior to settlement; this will give you the opportunity to have the property re-valued. Any difference in the market value (what you paid for it) versus what the property is now valued is instant equity. You can then use this equity to cover the cost (or part of) your initial deposit or perhaps even purchase another property. You will be able to borrow 80% of your LVR (loan to value ratio), in most cases, on the new valuation, so take advantage.
- Lease the property – Begin discussions with property managers as early as possible so that the property will be leased as soon as it settles (literally the next day). This means that you aren’t covering costs that can otherwise be covered by having a tenant.
And lastly, buy everything online – it is cheaper!
2) Discount Purchasing
This is a simple one a lot of people don’t take advantage of: buying a property for under the “market” value.The discounted price you purchase the property for will immediately become equity in the property that you can then use as the deposit (or part of). I used this strategy myself to purchase my first property, so it does work!
When looking at property always establish the vendor’s need/motivation for selling. If they want a quick sale (might be a mortgagee or a divorce situation) then there is an opportunity for a discounted purchase. Always utilise your real estate agents in this respect as they can be a valuable source of information and remember, never offer your best price first, start at the lowest price possible and then work your way up from there.
Part 2 of “Adding Value” will be available soon, so stay tuned.