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Investors need equity to keep growing their property portfolios – but how can you speed up the process?
Blogger: Nick Burke, director, Property 4 Profit
In our last blog post in this series on instant equity we posed the question Can Instant Equity Really be Achieved?
And the good news is that the answer is a resounding YES it can. And the even better news is that investors have a number of choices available to them.
There are in facts lots of ways of making instant equity and today we will look at three of the top seven of them.
Probably the most popular method of boosting the value (and rental income) of a property is to quickly renovate immediately after purchase. Ideally a small, quick and easy to manage renovation of a typical investment property might cost $30,000 and add perhaps $50,000 to $60,000 worth of value. At the same time, if this is to be a “buy, renovate and hold” strategy rather than a “buy, renovate and sell” (flipping) strategy, you would expect this renovation to add perhaps $50 or $60 per week or more to the rental income.
This method is the most popular method for generating instant equity. It is tried and tested and it works. However it does require a lot of time, skill and expertise on the part of the investor and a good understand of building matters. However that is not to say that it works every time. Often costs blow out, and investors end up overcapitalising, ie. spending more on the renovation than they generate in value. You need to be able to accurately forecast how much the renovation will cost, and know how much extra value that cost will add to the property for this method to work for you.
2. Finding motivated sellers
Sellers of property will typically sell for less when they are motivated to do so. “Motivated” is a sanitised word to make buyers feel better about the fact that they are really buying from someone in distress who has no option but to accept a lower price, in the absence of any better offers.
At real estate agents' training school in the bad old days they called this the Three Ds: Death, Divorce and Debt. When one of these three Ds are present, real estate agents can obtain listings and property buyers can grab bargains. Usually agents are the first to shout this from the rooftops, advertising deceased estates in their headlines or volunteering at open for inspections – when asked about the reason for sale – that the couple are separating. (It has always bewildered me why an agent would volunteer such personal information when doing so obviously contravenes their legal and moral obligation to achieve the highest price.)
There are numerous ways of finding such properties, including Public Trustee Auctions, and cosying up with agents in an area in order to find out about these listings.
In a balanced market, there should be a builder’s margin available. This is why property developers develop property … to turn a profit. So more experienced investors, sometimes sick of making someone else a profit margin when they buy, start to eye-off that potential margin for themselves. Why pay a developer a margin of perhaps 20 per cent, when, if you were to do the building and/or the developing yourself, this margin could be your instant equity?
It’s easier said than done, with large debts, risky resales markets and uncertain building costs being just some of the challenges you will face. These are just some of the main factors that cause property developers to go bust all the time, even some of the largest, most experienced and well known.
Turning a 20 per cent profit margin into your own instant equity is surely appealing, but with it comes a risk profile that few mum-and-dad investors are comfortable with.
In our next in this series of blog posts on instant equity we’ll be looking at three more methods that can generate you 10 per cent or more in instant equity.