Investors are constantly chasing capital growth, and the faster they can get it, the better – but is it really possible to create 'instant equity'?
Blogger: Nick Burke, director, Property 4 Profit
The goal of every property investor revolves around creating equity.
Ultimately we want to create as much equity as possible in the shortest possible timeframe, and we want to do so safely.
And the traditional, well-trodden path is to invest in the right property in the right locations. Properties and locations that you believe are more likely than others to increase in value.
Of course other considerations have to be taken into account. Factors such as cashflows, borrowing capacity, risk factors and many more.
But then, ultimately, it’s a waiting game. You need time to have its effect on the property market, and your property in particular. You’re waiting for the magic formula of house price inflation times leverage to increase your net equity position.
And it’s basically a race against the clock. Can you accumulate sufficient equity fast enough? That is; enough equity to retire much sooner and much wealthier than you otherwise would.
Most Investors Fail
Unfortunately the answer for the vast majority of investors is no. They can’t do it fast enough.
We know this because data from the ATO tells us that of the 8% of Australians who own investment property, 73% only own only one and 90% own either one or two.
And one or two properties is generally not enough to retire on. Even if they were unencumbered, two $400,000 properties would only yield a gross retirement income of roughly $40,000 per annum. That’s hardly a retirement income that most would call comfortable.
So what is required is a way to speed the process up. A kind of time machine if you will; one that enables investors to accumulate more equity, and to accumulate that equity faster.
So, sensibly, many investors go prospecting for these rare gems. Properties on which the rate of accumulation of equity is much faster than on traditional property. Ideally the accelerated rate at which the equity can be accumulated comes at the early stages of the property’s life, when the property is first purchased.
This is called Instant Equity investing, or sometimes manufactured equity, and it is, or should be, the holy grail for every property investor. Why wait around for the market to reward you, when, by being smarter than the average investor you can create your own rewards?
In fact there are many ways that investors can manufacture their own equity.
The main ones include renovation, developing, finding ‘motivated’ sellers, using buyer’s agents and networking.
Choosing which method is right for you will depend on a number of factors, mostly factors that relate to you and your own specific circumstances more than they relate to the property market. It usually comes down to the three factors of; time, expertise and money.
Renovating and networking generally take a lot of time. And as most investors are working full-time jobs and have other commitments such as family matters, time poor people can often struggle to find the deals or get around to doing the renovations, particularly when they are effectively competing against others who can afford to do this full time.
Development takes money and usually takes investors to a risk level beyond that of a passive investor.
And finally using a buyer’s agent takes money. You have to be convinced that your chosen buyer’s agent will save you so much there is still equity in it for you after paying their fee.
The good news is that the answer to the question posed in the title of this blog: Can Instant Equity REALLY be Achieved?... is YES it can. We see people every week buying below market value and, critically, being able to access that equity immediately at settlement, within a week or even a day, rather than having to wait years for markets to grow.
In the second part on this blog series on Instant Equity, I will analyse three of the most popular strategies for creating instant equity in more detail, so that you can decide which one is right for you.