Value adding – how to sniff out instant equity
With many capital cities and regional centres around the country tipped for double digit growth in 2014, it’s time to focus on how to take full advantage of the market and products available to accelerate your equity and portfolio development.
Selecting the right “value add” property is the key to rapidly increasing your portfolio and investment returns.
Homes on blocks with sub division potential
Blocks with sub division potential– allowing you to divide, develop, sell or lease the new property – provide significant opportunity for creating instant equity.
While sub dividing can be highly rewarding, it can also be a very complex process. Thorough due diligence is paramount as there are a number of factors to take into account that will affect the success of the project. These include zoning, access and drainage, among others.
Multiple discussions with the local council and other consultants such as engineers and architects will be required to ensure you meet all relevant government regulations and develop a property that will appeal to the market and make you a profit.
One of the greatest advantages of a house and land package is the instant equity that can be generated. 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 in well-researched markets that, following the typical five-month build timeframe, the completed property is worth an additional $100,000 over costs to construct.
Purchasing a house and land package early on in your investment journey can provide you with the immediate funding ability to make another investment.
Off the plan properties
With construction of off the plan properties often taking six to 12 months, investors are given an extended timeframe to settle. In a rising market, investors can take advantage of this additional time to generate capital growth. As the property is purchased based on a fixed price contract, any equity the property generates between the deposit payment and settlement is the investor’s capital gain.
Astute property investors can add substantial capital value to older style properties especially if homes in the area are undervalued, run down or rented below the market. When undertaking reno projects, it’s essential to consider the leasing market in the property’s location. The renovations must appeal to the local market if you’re to achieve the full rental potential of the property and avoid overcapitalising.
Mortgagee sales – where banks are forced to sell properties due to unpaid mortgages – can offer excellent opportunities to pick up investments at below market value.
It’s not uncommon to see these types of properties sell for 10 to 15% below the market – the banks are typically desperate to sell and know buyers expect a discount.
Seeking out properties with the potential for ‘instant’ equity will enable you to take full advantage of the rising market, purchase again quickly and give your portfolio a real boost in 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.
House and land packages – a strong start to investing
Over the past few years house and land packages have become increasingly popular with investors as a way to enter the property market.
House and land packages offer a number of distinct advantages when compared to buying an established home.
Firstly, they tend to be competitively priced and offer a lower cost entry into the property market. In addition to this entry advantage, investors can avoid paying stamp duty in certain states. This can be a saving of thousands of dollars when compared with the potential stamp duty payable when buying an established home.
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 the rental returns of the property.
In a rising property market, there is also the opportunity to lock in construction and land prices by using a fixed price contract and end up with a property worth significantly more than what it was purchased for. During the period elapsed from the contract being signed to completion and handover of the property, any increase in the value is to the benefit of the buyer, not the seller. In rising markets it is not unusual to see properties settling with instant equity, which the investor can borrow against to assist in future purchases.
The main advantage of a house and land package is that the property is brand new and comes complete with builders warranty and low maintenance costs. Buying older properties can eat into any cash reserves available, as maintaining older homes can be quite expensive and they are less appealing to higher end corporate tenants. A new home also offers attractive tax depreciation benefits that can significantly boost the properties return come tax time.
House & Land packages can serve as the ideal first investment to the cash-flow positive investor offering; increased rental return, lower maintenance costs, depreciation and the potential to capitalise on rising markets whilst protected by fixed price contract.
Crawford Property Group is currently offering a number of House & Land packages in Positive Property Hotspots.