“Adding Value” – Part 2
Part 1 of “Adding Value” reviewed ways in which we can implement strategies such as renovation and buying at a discount to provide instant equity within our investment property. Part 2 will pick up where we left off and give an insight into the remaining strategies, namely strata title, subdivision, and purchasing off the plan.
Strata Title is a really straightforward strategy. It basically involves the ownership of a set of units/flats that are currently on one title, and splitting that title so that each unit/flat on the block has an individual title. This enables you to sell each of the units individually rather than as a set.
The great thing about strata title is that it adds immediate value to your investment. Here’s a brief example of how one would implement this strategy:
Brad purchases a set of 4 units for $400,000 + stamp duty and government fees. Brad then engages a building surveyor to draw up the new lots, essentially creating a boundary for each unit. The building surveyor then liaises with the council and pays a strata title fee (which Brad reimburses) to have the individual title split into 4 separate titles, one for each unit. Once this has been approved and signed off by the local council Brad then approaches a real estate agent (or two, depending on which strategy you prefer) to sell the newly strata titled properties at $200,000 each. The properties sell over a period of time for the agreed price; Brad then pays his Capital Gains Tax (however, there are ways to get around paying exuberant tax through keeping one of the units), Real Estate Agent commissions and any associated holding costs (mortgage repayments etc) and pockets the rest in profit.
Sounds pretty simple right? In theory most things are, however, there are a few challenges and these include:
- Finding a potential strata title property – These can be few and far between so if you do find one, jump on it!
- Upfront costs – The costs associated with strata title i.e. purchase cost, stamp duty, government fees, building surveyor fees, strata title fees etc can be quite costly, however if you are in a financial position to take advantage of a strata title property it is definitely profitable. Having said that, always do your due diligence by completing a feasibility study (crunch some numbers) to give yourself the best indication of costs versus end profit. This will guide you in terms of wether the project is worth doing or not and should be implemented prior to purchasing any investment property.
- Fire rating requirements – If the units are adjoining (share a party wall) then they will need to meet current fire rating requirements and industry standards regardless of when they were built. Concrete in this respect is always the number one preference for strata title developments (timber is a big NO NO), it will save you a fortune in fire separation costs.
The great thing about newly strata titled properties is that it usually ends up in a win-win for both the buyer and the seller. This was the case with my first property purchase, and it was one of the ways I managed to secure it for under the market value. The seller was making a substantial profit on each unit through the strata title, in comparison to what he would have made selling it as one set of four units, and was in a position to undercut other competition in the market by providing a cheaper comparable product and thus creating higher demand, quicker sales and a reduction in his overall holding costs. In fact, the properties were such a good price that they never even made it to the listing page of the local newspaper, each one of them was purchased by the tenants (myself included) currently residing in them!
Subdivision is a very common strategy that is implemented by most everyday homeowners who are looking to create some additional cash flow.
The process involves dividing a single piece of property into separate lots, which will be sold off individually as either a house or land. For example, if you purchased a home that was on a 1000sqm block you could then subdivide the block into two 500sqm blocks. You can then decide to keep the original property or rent it out, sell the vacant block or develop it yourself.
The process of obtaining a subdivision permit is extensive. Initially you will need to liaise with the council’s town planners to obtain information on the site – appropriate zoning, caveats, overlays etc. This will give you an indication of whether or not you can actually subdivide the property. Once you have ascertained that you can subdivide the property you will need to engage consultants such as architects and civil engineers to prepare documentation for submission to council to achieve a development approval, without this you will not be able to develop the additional land. Once the development approval is granted the value of the property will have increased substantially because it can now be utilised. At this point you can decide whether you would like to develop the block yourself or pass it onto someone else to develop. Obviously the profits associated with developing the block yourself will be far more substantial; however on the flip side the obvious impact of going through the development and building approval stages, construction and all related infrastructure can be expensive and more importantly timely.
If you do decide to develop the project, the architect and civil/hydraulics engineers etc will complete the full documentation to a point where it can be submitted to council for a building permit and finally submitted to a preferred builder who will complete the project. It is paramount if you do decide to develop the block yourself that you work with people you trust and who have a good reputation in the industry. Unfortunately as is the case with most things in life you get what you pay for, and trying to “skimp” on costs will only end up costing you more, so do it once and do it right.
Buying Off The Plan
Buying off the plan has become extremely popular with first home owners over the last few years, in part mostly to additional government grants being offered, but how does it fair as an investment strategy?
The old saying goes that time is more valuable than money and when buying off the plan this ideology is paramount. On average when you purchase property you have to settle on it within 30-120 days, when buying off the plan the settlement can be anywhere between 1-3years, depending on the project. The advantage of this is minimal upfront costs (usually 5-10% deposit) with the ability to purchase the property at today’s price and settle on it knowing that you have already created equity in the property in the time it took between paying the deposit and project completion.
There are risks involved in buying off the plan. The main one is if the project is not completed because the developer/builder goes bankrupt, has funding issues etc., your deposit in this respect is in jeopardy. However, this can be offset by using a deposit bond in lieu of cash. For a fee you can have an insurance company provide the deposit on your behalf and guarantee that 10% is available to the developer, this ensures that no physical cash of your own is in the project with the exception of the money you would use to secure the deposit bond – the cost will vary from lender to lender but work on a 1-1.5% of the total purchase price for approximate figures.
When looking at where to purchase off the plan, the tips outlined in my blog on where to invest are still to be implemented. There’s no use buying off the plan in an area that is not going to experience good capital growth, will not provide you with a good rental return and more importantly won’t create equity to purchase another investment property.