In years past, property investors from varying backgrounds were united in one over-riding belief: real estate would always, eventually, increase in value.
Times are changing. Gone are the days when investors could blindly believe that the homes in their portfolio will grow in value every seven to 10 years, give or take. In certain markets, some property values have barely moved in a decade – or worse, they’ve gone backwards.
“The thing about the Australia property market is that it’s not one single market, and it’s not several markets– it’s thousands,” explains Luke Berry, director of Thirdi Property Group.
“Relying on the market to improve to get gains, that’s an old strategy from five to 10 years ago – it doesn’t work like that anymore. You need to use a more creative approach to make sure you’re creating instant equity and starting off on the right foot from the very beginning.”
And make no mistakes about it – creating instant equity in a property deal is readily achievable, according to our experts. But it doesn’t come easily, and investors must be prepared to invest in extensive research and due diligence to unearth the best deals.
“In the early days for me, finding under-market deals with instant equity consisted of doing hours of tireless research and networking with real estate agents to let them know I was serious,” explains Nathan Birch, director of BInvested.com.au.
“Today, it’s a matter of expanding on those relationships to make sure the agents call me first when the next hot deal comes up. Pounding the pavement and visiting areas, inspecting properties and giving clarity to real estate agents about what you are looking for is important.”
In terms of locations, Birch believes there are opportunities all over Australia. It’s less about where you look, he says, and more about your ability to spot good value – whether you’re browsing properties in Brisbane, Ballarat or Balmoral.
“In my experience, when media and buyers fear an area, there is less competition and therefore a greater opportunity to negotiate even a lower price. When you’re negotiating, you need to be armed with all your research and be in a position to make a quick decision,” he says.
“I buy properties at about 20% below market value as a starting point. As long as the numbers stack up from an equity gain position from day one, and there is a strong cash-flow, I will purchase any most locations at the right price.”
Manufacturing equity through renovations
One strategy that many investors use to create instant equity is through smart renovations.
“Improving a rundown investment property increases the rent, increases the appeal to tenants, and gives you depreciation allowances,” explains Michael Yardney, director of Metropole Property Strategists.
“More importantly, it ‘manufactures’ instant equity. Spending $40,000 wisely can increase the value of a property by $60-$70,000.”
In general, Yardney recommends spending no more than around 10% of the property’s value on improving it.
The secret to success is investing in renovations that will add value to the home, rather than simply adding appeal.
“If you spend a few thousand dollars, for example on a coat of paint, you would increase its appeal, but wouldn’t create extra equity – its value wouldn’t increase dramatically,” Yardney clarifies.
“At the same time if you overcapitalise, again you would not create equity, in fact you could lose it. The sweet spot of judiciously spending around 10% of the value of the property on appropriate renovations can create substantial equity in a period of 4 to 6 weeks.”
‘Cheap’ vs ‘undervalued’
Everybody loves a bargain, but it’s important that you don’t get seduced by the lure of low purchase prices. As a property investor, you need to focus on finding the best value property on the market, rather than the cheapest possible purchase.
“You make your money when you buy – not by buying cheaply, but by buying well and investing in the right property,” says Yardney.
“There are a lot of secondary properties on the market at present that can be bought cheaply, but there’s a reason for that; no one wants to buy them. So I don’t try to create equity by buying a cheap property. Instead, I look for a an ‘investment grade property’ that I can buy below its intrinsic value, either from a motivated vendor or by negotiating well.”
Motivated sellers are those homeowners who don’t want to sell, but need to: they may be relocating through work, or they could be facing financial pressure due to divorce, illness, a death in the family or other trying circumstances.
“Truly motivated sellers don’t usually announce that they’re keen. The circumstances generally tell the full story and they try to play down their eagerness,” Yardney says.
“I’m not suggesting that you take advantage of these people … But if you can find people with problems or problem properties and solve these problems, you will do well. The problem may be as simple as the vendor just wants to quit the property. That’s easy to solve; buy it at a bargain price. Or the problem may be more complex, as the property is run down, and the solution may be a make-over or renovation that adds value.”
Another formula for success
The ability to create instant equity in a property deal falls back on the age-old principle of supply and demand, says Berry.
“Creating instant equity is about buying well and building well,”
“Our business is based on this philosophy and we do that on behalf of our clients, but that doesn’t mean you can’t do that yourself as an independent investor.”
Berry outlines three simple steps for investors keen to boost their profits at the outset:
- Identify an area that is undersupplied in a certain type of property;
- Use your research and networks to create a property that fits that undersupply;
- Deliver an investment that creates instant equity.
“In Toowoomba, for instance, we created a number of house and duplex sites that we sold to individual clients, they each made $50,000 in equity immediately,” he explains.
“We identified the area and realised it was set to perform, because it was undersupplied with family homes. The same thing happened in Mudgee – there were only 25 lots that could be developed into family homes, and the next parcel of land to be developed was not even out of council approval stage, so it was at least 18 months away. Our clients paid $370,000 each for a house and land package that now is worth $440,000, and rents for $450 per week.”
The power of many
If you think these kinds of deals are only available to investors who are linked in with property buying groups and clubs, then think again.
“I think an individual investor could achieve these same results, with the right research and the right approach,” Berry confirms.
“It all comes down to doing your research and working out where the undersupply is. You might work out that in a certain area, there’s an undersupply of newer, more modern apartments. So if you buy an older unit and renovate, you can deliver a property that matches demand in the area and becomes a popular rental.”
Another option is to join forces with likeminded investors – whether they’re friends, family members, colleagues or simply other investors you’ve met along the way – to give you a better bargaining position as a buyer.
“One thing you can aim for is strength in numbers,” Berry explains.
“It’s all about economies of scale. If you can offer bulk-buying power to land developers and builders, you’re going to be able to negotiate a bigger discount. Whether you’ve got one friend, two friends or five friends, any developer is going to pay attention – if there’s a way for them to sell several properties at one time, then you’ve made their job easier and you’re in a better position to negotiate.”
The same philosophy applies when you’re buying an established home, Berry adds, and also if you plan to renovate.
“If you approach a real estate agent and say, ‘I’ve got 5 friends and we want to buy in this market’, they may be willing to reduce their commission in order to get multiple sales through,” he says.
“And when you’re buying five bathroom doors instead of one during a renovation, you’ll be able get a bigger discount then, too.”