Earning greater profits from your properties is a shared goal amongst investors – and the good news is, there are many ways to achieve this.
When Your Investment Property asked Jeremy Sheppard, co-founder of LocationScore.com.au, how to buy below market value and get a property revalued at market value, he immediately opposed the idea.
“Technically, there is no such thing as ‘buying below market value’ because the property’s new value is what you just paid for it,” Sheppard says.
“However, theoretically, it can be done. But you won’t be able to capitalise on it until a decent number of other sales of similar properties in the vicinity occur at ‘fair’ market value or higher.”
The problem? Other buyers will refer to your purchase price and attempt to negotiate a lower price for their property as a result.
Buying below market value may then set the new standard for prices in the area, and if the trend continues, your unrealised profit will be eroded by further hard negotiating by other buyers.
Sheppard instead recommended buying in markets where it is impossible to buy below market value. He encouraged investors to purchase in markets where the only way to get in is to pay above market price. These are markets where demand exceeds supply.
“No seller needs to accept a below market value in a hot market. Why would an investor want to buy into a cold market? Even if they did get a bargain, they wouldn’t get growth,” he says.
If most buyers are paying above market value, it’s called capital growth. If most buyers are able to buy below market value, it’s called negative growth.
Every below market transaction is a kick in the teeth for capital growth, according to Sheppard, so investors should avoid markets where buying below market value is possible if they want to see capital growth.
To increase profits from a property you currently own, Sheppard revealed his top three strategies:
1. Cut costs
- Shop around for better mortgage rates, insurance, property management fees. Be careful not to sacrifice too significantly on features/service.
- Self-manage. Not advisable, but not extremely difficult, either.
- Self-maintain. Again, not advisable, especially where building standards need to be adhered to.
2. Increase rent
- Ask your property manager if this is possible given the current lease and market conditions.
- Add some small features or benefits the tenant is willing to pay extra for e.g. a garden shed, allowing pets, etc.
- Rent per room. Can be a nuisance due to higher tenant turnover.
- Rent fully or partially furnished.
- Short-term rentals. Not advisable and not effective in many locations. Holiday locations are ideal.
3. Increase value
- Add a granny flat (this increases rent, too)
- Renovate bathroom, kitchen, etc.
- Extend deck, extra room, extra floor, carport, etc.
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