It’s the holy grail of real estate investing: a deal so good that within months or even weeks of buying a property, it has already increased in value. According to the experts, these deals are available everywhere – even in a flat market – as long as you know the best places to look and the right questions to ask. Sarah Megginson reports
In years gone past, property investors of various means and from varying backgrounds were united in one overriding belief: that real estate would always, eventually, increase in value.
But times they are a-changing. Gone are the days when investors could blindly believe that the homes in their portfolios would grow in value every seven to 10 years, give or take a few. In certain markets, some property values have barely moved in a decade – or worse, they have 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 in 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 run-down 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 $60,000–$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 four to six weeks.”
‘Cheap’ vs. ‘Undervalued’
Everybody loves a bargain, but it is 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 do not 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 makeover or renovation that adds value.”
Another formula for success
The ability to create instant equity in a property deal lies in the age-old principle of supply and demand, says Berry.
“Creating instant equity is about buying well and building well,” Berry says.
“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 it 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 with 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.
“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 is now 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 like-minded investors – whether they are friends, family members, colleagues, or simply other investors you have 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 are 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 five 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.”
4 steps to creating instant equity
“At times of slow capital growth, I create equity and find properties that will outperform the general marketplace by using a four-stranded strategic approach,” says Michael Yardney, director of Metropole Property Strategists.
- Look for a property with a twist – something unique, special, different or scarce.
- Purchase in an area that has a long history of strong capital growth.
- Pay a price that is well below its intrinsic value.
- Look for opportunities to manufacture equity through refurbishment, renovations or redevelopment.
Real Life Strategy #1
Sweat equity
“I doubled my investment in two weeks”
A builder by trade, Mitchel Hagar has seen his own home more than quadruple in value over the years: he bought the Revesby Heights home in 1994 for $160,000, and it’s now worth around $950,000.
But while this ‘time in the market’ strategy has clearly worked, the 51-year-old – who renovates properties for clients in Sydney’s eastern suburbs through his business, MSA Building and Project Management Pty Ltd – has also put his own skills to good use to boost his property portfolio.
Mitchel has invested in property since his mid-20s, buying, renovating and selling along the way. More recently, he has also begun acquiring newer homes throughout Queensland under the guidance of The Investors Club. But it was in 2008 that Mitchel was able to double his renovation investment in a property, simply by investing some sweat equity – and this was just as the global financial crisis was settling in.
“I actually bought the house up the road in Revesby Heights. The seller had passed away and it was a deceased estate, and at first I had no interest in buying it at all,” Mitchel explains.
“But I’d been reading a lot about property and educating myself about investing, so I went and had a look at it. After walking through it I could see the potential, so I decided to buy it.”
The property
The home is an older-style 1960s house located on a large duplex site that Mitchel plans to develop down the track. It was listed for $490,000 and he negotiated the price down to $460,000, before embarking on a series of renovations and upgrades over two weeks.
He called in a few favours from fellow tradies where possible, allowing him to renovate the whole home for around $20,000. Mitchel estimates that without the benefit of ‘mates’ rates’ and leveraging his own skills, the renovation cost would have doubled.
“I polished the floorboards, installed new carpets, painted the walls, upgraded the lights, and installed a new kitchen – well, a second-hand kitchen. We were renovating our own home at the time with a new kitchen, so I moved our old kitchen into the rental property,” he explains.
His $20,000 investment coupled with two weeks of sweat equity paid off, with the house valued at around $500,000 immediately post-reno – an increase of $40,000 on his purchase price. He effectively doubled his investment in two weeks, and boosted his rental returns at the same time.
Current day
Today, the home is worth around $600,000 and rents for $450 per week, up from $360 initially. Eventually, he would like to demolish the house and build a duplex, which will create considerable new equity.
But for now, the property is ticking along nicely. “I have plans to do up the garage soon,” he adds. “There’s a separate toilet in there, so if I turn that into a rumpus room or a sleep out, we’ll be able to lift the rent by another $50 to $70 per week.”
Real Life Strategy #2
Off the plan
“One property valued $350,000 higher upon settlement”
With more than 30 properties in his portfolio, Ian Hosking-Richards says buying off the plan has allowed him to put very little money into each deal– and sometimes none at all – due the instant equity created in each purchase.
But he is quick to point out that not every off-the-plan deal is guaranteed to be a winner.
“To be successful you need to buy well upfront or buy off the plan at a good price, in a growing market, with a long lead time,” he says.
“In June 2006, I bought a couple of three-bedroom apartments in Townsville off the plan for $296,000 each. When the bank valued them upon completion in August 2008, they were valued at $400,000, more than $100,000 more than I paid.”
More recently, Ian purchased a two-bedroom apartment in Gladstone in May 2011, paying $425,000. When construction was completed last year, the bank valued the property at $475,000, an equity boost of $50,000.
As a result, the bank was willing to lend him $427,500 at a 90% lend – $2,500 more than the property’s purchase price. He was therefore able to use his equity to finance his full deposit.
“The interesting thing about that deal was that there was a range of different apartments for sale, ranging in price from $399,000 up to $435,000. The property I bought has a bit of a water view and was in a nice elevated location, so the purchase price was towards the higher end of the scale,” Ian explains.
“One of my clients also bought into the development and took one of the cheapest apartments on the ground floor for $399,000. And he got exactly the same end valuation as I did! So his profit was $76,000. I always say that you shouldn’t pay a premium if you’re not getting a huge benefit or rental increase in return, but for whatever strange reason, I didn’t follow my own advice. I’m happy for him though – at least someone benefited.”
He may have missed out on a little extra profit in that instance, but he more than made up for it when he recently settled the purchase of a Sydney property a few months ago. In December 2012, Ian took ownership of an apartment in the luxury development The Residence, adjacent to Hyde Park in the CBD.
“In 2008 I contracted on the two-bedroom property for $1.75m. It was a four-year build and my bank valuation upon settlement was $2.1m,” he says. “I’ve certainly done very well out of buying off the plan; it’s helped me to fast-track my portfolio as I can borrow against the instant equity to fund future purchases. The key to success is to buy into a growing market and borrow against the end valuation.”
Real Life Strategy #3
Duplex deal
“We created instant equity of almost $100,000”
When Dave and Dawn Evans began researching the property market in Toowoomba, they were quickly satisfied that the regional Queensland town, located around 130km west of Brisbane, was set to perform.
“Not only is Toowoomba central to the billion-dollar investment in Queensland’s mining-based industries, but it also has a long-standing and diverse industry in health, education, manufacturing and agricultural, making it a sound investment destination,” Dave says.
But while they knew where they wanted to invest, they didn’t know what to invest in. So the couple hit the phones and chatted with the locals to uncover the best opportunities to grow their money.
“We spoke with a number of local real estate agents to gain an understanding of the market and find out what type of rental properties were in the greatest demand,” Dave explains.
It was then that they realised they would be better off buying two properties rather than one, by investing in a duplex development instead of a straight-up house and land package. The decision turned out to be a profitable one, as it procured them close to $100,000 in instant equity.
The couple purchased a block of land and developed a duplex, with each side boasting three bedrooms.
“We paid $542,500 all up, and the bank valuation, which is notoriously conservative, showed an increase of $40,000 at the completed valuation,” Dave says.
“However, local real estate agents are suggesting that each unit could fetch $310,000 to $320,000, which puts the uplift in value closer to $100,000. So depending on how you look at it, the minimum we created is $40,000, or our potential instant equity if based on the sales appraisal is $97,500.”
The properties will rent for around $650 per week combined, so the deal is positively cash-flowed.
“We plan to strata title property upon completion whilst renting out both the units, then down the track we will be able to sell off one of the units and maintain one for our property portfolio,” Dave says.
Real Life Strategy #4
Cosmetic renovations and subdividing
“We could sell half of our block for $200k profit today”
Seasoned investor Margaret Lomas knows how to spot a good deal from a mile away, but this buy was exceptional even for her standards!
When she and her daughter began looking for a property to buy together, they decided to focus on Terrigal and its surrounds, despite the fact that Margaret does not believe Terrigal “has much in the way of growth drivers”.
“The deal had to be good enough to make a good profit, because as a straight investment area I don’t believe it suffices. So it was crucial that we found a property that had a potential upside, perhaps on a large, subdividable block,” she says.
Browsing the online classifieds one Friday night, Margaret came across a property that was due for auction the following morning.
“I’m not sure why it hadn’t come across our radar earlier. It was a 1980s era house on a block of 1,100sqm, which is technically of subdividable size in the area, but it wasn’t marketed as such because no one really knew whether it was allowable,” she explains.
“Being Friday night with an auction the next day, I had no chance to call council to confirm. Add to that the fact that my daughter, an international flight attendant, was in LA, and you can see what we were facing – a property that might be able to be subdivided, which my daughter wasn’t going to be able to view, which we had basically hours to think about. It wasn’t ideal and it was a situation that was completely against my philosophies – I always caution buyers not to go into any deal until they can confirm all the details and do all the research.”
A few well-placed phone calls to local real estate agents revealed that the vendor was a young guy who had bought the property from his dad. He was leaving for overseas in a few days and just needed it sold. Marketed at around $450,000, it was in Margaret’s price range.
So, she and her son-in-law turned up the following morning having never before attended an auction – “I believe auctions are a really bad idea for investors, so I avoid them,” she confesses – and discovered that it was home to four guys in their twenties, who had lived there for years.
“I think that says enough about the condition! The gardens were a jungle, the carpets were filthy, there were hundreds of empty spirit bottles littering the kitchen, and there were old bits of furniture everywhere,” Margaret says.
“The garage underneath the house was full of debris – but, making our way through it, we found a bedroom, lounge room and small bathroom, all being used for storage. Suddenly, the three-bedroom, one-bathroom house became a four-bedroom, two-bathroom house, with the bottom level easily separated as its own flat.”
The auction fell flat, with Margaret as the only bidder at $350,000. Once the auction was officially closed, she made a final offer of $400,000, and the vendor accepted.
Fortunately, Margaret’s daughter liked the property and upon settlement they quickly commenced a series of cosmetic renovations, including:
- pulling up the carpets and waxing the floors ($50)
- replacing the chenille curtains with white basswood 50mm timber blinds throughout ($1,200)
- painting the brown skirtings white and the walls a stone grey ($1,000)
- changing all door handles and kitchen handles to brushed chrome ($350)
- gurneying the outside timber deck and spa ($300)
- carpeting the two back bedrooms in a modern waffle carpet where the floors were not so good ($450)
- painting the green gutters and railings black ($100)
In total, the renovation cost of $3,450 added upwards of $80,000 to the home’s value in instant equity.
“Now it looks amazing and I feel we could easily re-sell it today for between $480,000 and $500,000,” Margaret says.
But there’s more: 550sqm of this rectangle block had already been cut off physically by a fence across the backyard. The neighbour revealed that the son had not realised this was even part of his allotment initially, even though his dad had spent $40,000 on easements in anticipation of subdividing. Down the track, Margaret and her daughter now have plans to battle-axe the property and build another dwelling.
“This is unlikely to affect the value of the front block and house, since 550sqm is the norm in this area, and if we can’t go ahead with the subdivision the person who owns 1,000 sqm directly behind the property has indicated he is interested,” Margaret says.
“I feel we could easily get $200,000 for the block, and if that’s the case, we will have added $80,000 to $100,000 to the existing house through renovations, and a further $200,000 for the block.”
