Are you getting the best deal on your property purchases?
As investors, we actively seek to secure the best deal possible every time we make a purchase, don’t we?
After all, no one wants to pay more than they need to and we all want to ensure that we maximise opportunities for creating equity as quickly as possible.
So how do we find properties that will deliver us ‘instant’ equity?
And how can we master the often stressful and emotional purchase process?
It comes down to a combination of knowing how to identify properties with value-adding features and honing your negotiation skills.
Three questions to ask when identifying your next purchase:
Does the property have subdivision potential or is it in line for a re-zoning to higher density?
If yes, then you could have found yourself a gem. Sub-dividing and then selling or developing the additional lots can be very lucrative for the savvy investor. Developing property requires considerable further knowledge and skill so make sure you are well prepared if you take it on.
Is the property a diamond in the rough?
Many buyers can be put off by unattractive appearances. Often properties that don’t present pristinely or need a little TLC go un-noticed in the market. If the cosmetic problems are easily rectifiable, then a small investment into improving aesthetics could deliver a significant return.
Does the property have a below-market lease in place?
Often owners will accept lease terms below market value to secure a high quality corporate tenant or long term lease. This can impact the value of the property’s re-sale price based on achievable yield in some locations. Buying a property with a below-market lease in place is quite often a great way to secure a good buy. You may have to ride out a number of years at a lower return, however once the lease expires, the rate can return back to market and often instant equity is achieved in the property.
When you’re happy that the property offers some ‘instant’ equity potential, you need to consider the maximum amount you would be willing to pay for it and any opportunities that may enable you to lower the price.
Mastering the art of negotiation:
Do your homework
Research the market to gauge the amount of buyer interest, the time the property has been on market and what similar properties in the area have sold for in recent months. This will enable you to establish what you believe the market value of the property to be.
Find out more about the seller. Why are they selling? Is it an urgent sale? Has the price of the property been reduced during its time on the market? What interest has there been? This information will give you a great advantage ahead of entering negotiations.
Often the price is not the only motivator in property negotiations. Many sellers may also be motived by other needs including a swift or unconditional settlement. Ask what other terms may suit the sellers – being flexible to their additional needs could help you negotiate a better price.
Leave emotion at the door
When it comes time to make your offer, keep a poker face – don’t reveal your position or plans. Let the seller know that although this property may tick many boxes, you are considering a number of property. Play it cool and you’ll find yourself securing some great buys.
Mortgagee sales – how to find a winner, not a write-off
In my last blog I touched on mortgagee sales as a value-adding strategy when seeking out instant equity.
While the number of mortgagee sales on the market appears to be on the decline after hitting a peak in 2012 following the effects of the GFC, the numbers are still significant. In the 2013 financial year nearly 4,000 homes were repossessed in WA, NSW, Victoria and Queensland alone, according to various state court reports.
Adding to this is the concern from the RBA that many home buyers currently taking advantage of the low interest rates are failing to factor in future rate rises. Meaning that, when rates inevitably go up, many may not be able to afford their mortgages, resulting in another bout of repossessions.
It is a grim prospect for the owners and the economy. But for investors, mortgagee sales can provide excellent opportunities to pick up an asset at below market value. It’s not uncommon to see these types of properties to sell at a discount of 10 to 15% and with some additional TLC, these properties can provide rapid financial rewards.
However, investors should proceed with caution. Not all mortgagee sales represent a good investment. After all, the vendor is still there to get the best possible price and they will be well aware of what the property is worth.
Here are some critical questions you need to ask when considering a mortgagee sale to ensure you pick a winner and not a write-off:
Have you done your research?! As with any property investment, research is crucial when considering a repossession. A ‘bargain’ in an area with poor growth prospects and rental return due to its poor location and infrastructure, and requiring significant renovation, is not a bargain at all. Note that several repossessions in the same area can drag down house values.
Is it habitable? Keep in mind that the property may have been stripped of anything of value such as appliances and furnishings. The effect of this is two fold: it will not only add to the costs of the purchase because these items will need to be replaced before it can be tenanted, but your lender will also require the property to be habitable as a condition of the mortgage.
What maintenance or renovations does it require? This can also be another significant issue affecting the ‘value-add’ of mortgagee sales. It’s safe to say the owner has been struggling financially, so it’s likely the property won’t have been properly maintained meaning additional funds will be required to bring it up to a standard where it can be rented or sold again. This may offer up a fantastic opportunity for a money-making renovation – just be confident of what the renovations will deliver in equity terms to avoid over-capitalising.
What will be the settlement timeframe? Most properties will be vacant but selling a property that’s still tenanted is not unheard of and could delay settlement. On the other hand, remember the vendor is a bank and they will want to settle in the shortest timeframe possible, unless hindered by a tenant. Know what the settlement timeframe is likely to be and be well prepared with finance and documentation to avoid any penalty fees.
What will happen at auction? Mortgagee sales are always conducted via auction and can generate a lot of buyer interest due to the expectation of a bargain. This competition among buyers can therefore drive up the price to a point where the discount no longer exists and the potentially exciting equity gain becomes much less viable. If you’re worried about the auction, consider hiring a professional bidder to bid on your behalf. They will take the emotion out of the bidding, ensure you stay within budget and can help advise on what the property is worth.
In short, make sure you’re aware of ALL the costs involved with the purchase of a repossessed property before you buy it, know what it’s worth and stick to your budget. Mortgagee sales are one example where it’s highly recommended that you inspect the property prior to purchase
Holidays – The perfect time to plan your next investment move!
Holiday downtime can provide the perfect opportunity to reassess your current investment position, conduct a portfolio and financial health check and plan your next investment move – putting you in the best position to maximise returns in the new year.
Portfolio health check
Take a no nonsense look at each property in your portfolio, how it’s performing and whether it could be improved.
Strategy – First, review your strategy and goals. If your portfolio is not currently meeting your objectives, establish a plan to realign and improve performance. If your portfolio is negatively geared, you may need to revise your approach to focus on positive cash flow investments so that you’re not left out of pocket in 2014. Or, you may need to consider properties that will deliver some instant equity if your portfolio has not been growing as rapidly as you had hoped.
Finance – Are your current products and lenders providing you with the most competitive interest rates and fees? If you’re not sure what you’re paying, request this information from your loan provider and then compare with other products available. Utilise comparison websites and mortgage calculators. If you find better deals elsewhere, use this information to have your broker renegotiate with your current lender first to assess whether they can offer better terms. If not, consider refinancing – it could make a significant impact on your return.
Tax planning – Start preparing your investment property records well ahead of the new financial year to ensure you’re maximising your interest and tax depreciation deductions, and you have recorded any costs that can be used against Capital Gains Tax should you decide to sell in the future. Your property manager is the best person to access and provide you with this information.
Also review with your accountant whether you are utilising the best form of property ownership for tax purposes and your personal circumstances.
Maintenance – Up-to-date maintenance is critical in attracting the right tenants and rent, which in turn maintains the value of your property. Your property manager will be able to tell you what maintenance should be prioritised. Plan out what needs to be done, particularly if a lease is due to expire.
Structure – Is your portfolio structured to facilitate fast growth? Having all properties tied up in a single structure can be a major disadvantage as it often reduces your borrowing capacity and the ability to find better deals with other providers. Consider separating new investments into standalone structures so that equity in each property is protected, enabling you to continue building your portfolio by using a line of credit against the properties which have generated equity.
Equity – Establish what equity your portfolio may have generated by having the properties re-appraised by your local real estate professional. Also consider how some aesthetic improvements or additions could create equity that would allow you to expand your portfolio. Talk to your mortgage broker. This will give you an idea of what you have to work with for your next investment.
Plan your next move!
Spend some time utilising the wealth of free online resources to identify locations which display all the signs of good yields and capital growth. Research key factors such as industrial growth, infrastructure investment and low vacancy rates which suggest a population on the increase.
Investigate specific investment opportunities in your target areas, looking at those close to key infrastructure that would appeal to high salary workers, and calculate the potential yield and growth. Create a shortlist of opportunities and questions you have for the agents and you’ll then be ready to hit the ground running in the new year, giving your portfolio a flying start to 2014.
Maximise your equity to build a portfolio quickly
There are many factors that can impact your buying power when investing in property. Being aware of them and understanding how they can drive or limit your strategy is the key to fast portfolio growth.
Utilise LMI to get started sooner. If you are just starting out on your property investment journey you will either use a saved deposit or equity in your home to make your first investment. First time investors shouldn’t delay their wealth creation by waiting until they have a 20% deposit to get started – it’s common to borrow 90% and take out Lenders Mortgage Insurance (required if your deposit is less than 20%) to get into the market as quickly as possible. LMI is an acceptable and tax deductable method to get your portfolio started and growing. When your portfolio has generated sufficient equity you can start to buy properties with a larger deposit – without requiring LMI.
Maximise your buying power. Each lender has different assessment criteria and your approved amount could differ significantly between lenders so shop around to make sure you are maximising your borrowing capacity and getting the best interest rate structure.
As you grow your portfolio, you will want to diversify your lenders. It can be tempting to stay with the one lender for simplicity but there is ultimately a limit as to what a single lender can offer. Using different lenders provides greater flexibility of products, reduces risk and provides more opportunity to further build your portfolio.
The best way to make sure you’re getting the best deal every time is to engage the services of an experienced mortgage broker – one that specialises in investment property. A good broker will know which lenders are likely to be more flexible with their borrowing capacities and will offer a variety of products from different lenders. Developing a long term partnership with a broker is a key element of a successful investment strategy and rapid portfolio growth.
Create instant equity. Look for opportunities in the market that will deliver instant equity within six months of settlement. Instant equity might come in the form of a house and land package, renovating a well-located but older unit, or adding an extension, such as a granny flat. If a property can deliver at least $50,000 equity through one of these means you will be very well positioned to purchase again within 12 months.
Unlock value. As a property’s value grows, the equity in the asset increases providing a source of funds to borrow against. ‘Unlocking’ this value allows investors to buy more property quickly without needing to save for a deposit. Maximising the equity in the property will increase your borrowing capacity and could even generate enough for you to invest in more than one property.
Agents will often provide free valuations to give you an idea of the market price and can also offer advice on how to improve a property and which areas you should focus on. However, lenders will do their own valuations and investors should be prepared for these to come in under what they believe the market value to be. Keeping the property well maintained and making aesthetic improvements will ensure you achieve the highest valuation possible.
Instant Equity ideal for first time investors – House & land packages
This third and final installment on ideal options for first time investors looks at house and land packages.
Over the past few years, house and land packages have become increasingly popular with investors as a way to enter the property market and kick-start portfolio development.
Many providers of house and land packages will partner with mortgage brokers to offer low deposit finance options. Vendor finance (covered in Part 2) may also be available.
Often, investors will only need a deposit of ten percent to secure a H&L package. The finance is then drawn down in stages, in line with each phase of construction.
On a $750,000 H&L package, for example, the finance would look something like this:
- land cost: $250,000 – deposit required of $25,000
- build cost: $500,000 – deposit required of $50,000, following settlement of land
- loan drawn down in stages over construction period (four to five months)
In addition to a low deposit, there are several other key advantages H&L packages can offer investors.
Instant equity. One of the greatest advantages of an H&L package is the instant equity that can be generated, allowing the investor to purchase again very quickly. Locking in construction and land prices through a fixed price contract means that in a rising market, any increase in the value of the property between when the contract was signed to completion and handover is to the benefit of the buyer. It is not unusual to see, following the typical five-month build time frame, that the completed property is worth an additional $100,000 over costs to construct, providing the investor with immediate funding ability to purchase another property.
Save on stamp duty. With H&L packages, stamp duty is only payable on the price of the land. On an established house, it’s payable on the cost of the land and the house. This can represent a saving of thousands of dollars.
Increased tenant appeal. The purchase of a house and land package also benefits the investor by offering a wide range of configuration choices – ideal if they are targeting the corporate leasing sector. For example, investors can add additional ensuites to the plan of the home, which will appeal to renters and significantly boost rental returns.
Low maintenance. A new property comes complete with a builder’s warranty and the additional benefit of low maintenance costs. Maintaining older homes can be quite expensive and they are less appealing to corporate tenants. A new home also offers attractive tax depreciation benefits that can significantly boost the property’s return.
With leverage and multiple property purchasing the key to building a successful portfolio, House & land package options can be the ideal selection for beginner investors starting with low deposit funds.