How to create equity in a slower market
December 31, 2018 - Blog
It’s true that the market is always ideal for someone, with the current market conditions optimal for upgraders but also for renovators who want to create equity.
A strategy that we often recommend is to buy, renovate and hold so that investors can manufacture capital growth as well as higher rents.
However, there are a number of non-negotiables that you must understand before you begin.
1 Don’t over-capitalise
One of the common problems with renovations is the tendency to over-capitalise.
That means that someone decided to spend far above what was necessary to improve the property’s value and rental return.
Some people get caught up in what they personally like or install high-end fixtures and fittings that are unnecessary.
While each renovation is unique because of its location and the demographic of people living in that area, we do use a calculation to ensure a renovation is going to be worth it.
Say you want to spend $20,000 on a renovation and are using equity to finance it.
The increase in your repayments, based on an interest rate of five per cent, would be about $1,000 per year.
So, the renovation would need to increase the weekly rent to cover these additional repayments, by at least $20 per week. Any additional rent achieved would be bonus cash-flow in your pocket.
Of course, the second part of the equation is the property value uplift, which should also cover the cost of the renovation from, say, a valuation of $800,000 to $820,000 at least.
2 Understand the demographics
One of the most vital steps in successful renovations is an understanding of the local demographics to ensure you are providing what they want and need.
If you’re buying a property to renovate and hold in suburbs such as Manly Vale or Freshwater, you would likely buy an older unit that is need of modernisation.
The reason why you’d select a unit is because there is solid demand from renters in these locations, as well as it being much more affordable than a house.
All renters want a property that is clean, tidy and modern, which means updating some of the fixtures and fittings in apartments that were originally built in the 1970s for example.
Conversely, if the predominant demographic are families in a specific location like Allambie Heights, then you would buy a house because of the demand for this dwelling type from renters.
3 Keep it simple to maximise equity
One of the major problems with “reality” shows like The Block is that they make renovating seem easy, plus they generally are spending big on fixtures and fittings because they’re trying to achieve the highest sale price at the end of the season.
That is never a good strategy for smart investors who should spend wisely whilst also improving the value and rent of their property as much as possible.
One of the most under-rated cosmetic renovations is paint.
It’s amazing how it can transform the interior of a tired unit into a property that will be in demand from tenants.
Ditto, with tiling in the bathroom, because you don’t necessarily have to rip out old tiles.
Rather, you can keep costs down by simply tiling over the existing ones, if they are in good condition, which will also mean you save money on water-proofing.
When it comes to the kitchen, far too many people get carried away with expensive ovens and marble bench-tops or even complete kitchen fit-outs by high-street retailers.
The truth of the matter is that flat-pack kitchens, mid-range ovens and laminate bench tops are just as effective in upgrading a kitchen that has seen better days.
Another idea could be to install a drop ceiling and down lights in old mottled ceilings, which will instantaneously modernise it.
Renovating in slower conditions is the ideal time for savvy investors who aren’t prepared to sit on the sidelines just because the market is taking a breather.
Instead, they are creating their own equity in a property that will be in strong demand from renters.
After about six months, they also usually have the property revalued with the manufactured equity either used to undertake another renovation or towards growing their portfolio.
The smartest ones also understand that adopting a renovate to hold strategy, rather than flipping, will see their financial position strengthen with each passing year.
If you would like to be one of them and find out how you can take advantage of the current market, please get in touch with STRAND today and ask about our FREE Property Roadmap Meeting to help identify your next move towards buying a property.