Buy Property With Equity From Day One

Why would you wait for the real estate market to improve when you can buy property today and receive equity immediately?

If you were to listen to most of the media coverage of the property market today it’s all still doom and gloom. Yet in a time when most people are willing to sit on the fence and wait for the property market to improve, many people have continued to achieve double digitgains and seriously improve their financial position by considering and applying alternative property investment strategies. Many of which provide immediate equity positions on purchase and remove the need to rely on normal market price movements.

Certainly a primary consideration for many investors in today’s market is rental yield. This is being driven by a popular perception that it it may be some time before we see any meaningful growth through normal real estate price movements particularly in our capital cities.This sentiment was certainly reiterated back in September 2012 when Westpac CEO Gail Kelly publicly announced, “the years of compound growth in house prices are over for good!”

Yet while the lowering interest rates and increasing rental yields are providing some favorable investment conditions for positive yields, to be able to leverage an asset base to continue building a property portfolio, an increase in equity is still required.

May be it’s the fact we had it so good for so long by the market rising significantly through the last boom, most people seem to of forgotten there are a number of other ways aside from normal market upward price movement to achieve an increase in equity.

But before we discuss some of these equity creation strategies it’s important to understand what determines how much equity you have. When asked, most people say,“it’s determined by what someone is prepared to pay for your property.” This is true however, only if you are actually selling the property and receiving money from the buyer.

If you are planning to leverage equity in an existing property or one your thinking about buying and borrow against, it’s actually your bank or lender and their licensed valuers who will determine how much equity you have and ultimately what you can borrow.

By understanding this process and working with a good mortgage broker to conduct a mortgage securitization valuation on the chosen property before your completely committed to the purchase, you can provide a good deal of certainty about what your equity position will before you buy. This is one side of the equation. On the other side is of course the cost of the property.

Create immediate equity through improving or building.

Possibly the most predictable equity gain or an increase in property value can be achieved by improving a piece of real estate and in particular,by building on a vacant block of land.

Some of the most profitable exercises we have undertaken over the last few years on behalf of our clients have been to identify opportunities to build in an area of identified price disparity.

This is where we find a vacant block of land or development site and package it up by putting a turnkey building on it by way of a fixed price contract. This could be an individual house, duplex, townhouses or units. On completion our total out of pocket costs of the land and the building is significantly less than the values of comparative properties in the area.

When the bank conducts a mortgage valuation on completion the valuers will take comparable properties in the area into consideration and by default give you an immediate increase in equity in the property that can then be borrowed against.

A recent example of this was in the town of Collinsville approximately an hour south west of Bowen in Queensland. We purchase every vacant block of land in town we could on behalf of our clients for $50,000. We put a standard four bedroom house package on each block for $235,000 for the total investment outlay of $285,000. On completion the bank valued the property at $385,000 providing and immediate equity gain of $100,000 (or 26%). These properties also rented for $650 per week providing a strong cash flow positive return from day one.

Given the current market conditions we are continually finding similar opportunities all over the country. This strategy can work very well for individual investors purchasing individual house and land or duplex packages however, for units and townhouse projects the costs can be significantly higher. This tends to push this option out of reach form most investors individually. That is, out of reach individually, but not out of reach when individual investors come together and buy as a group.

Invest as a group to improve negotiation and buying power

The typical profit margin within a unit or townhouse development is larger than that of just a house or duplex build. This as well as the current market conditions is the reason for the recent increase in the number of investors grouping together as a syndicate to buy and build entire unit and townhouse projects. In effect they are removing the developers position and retaining the development profit as equity, which is usually around 20% of the property’s end value.

This is not the only way investors can benefit by buying as a group. Another way is is by negotiating a group discount with a developer who needs sales to meet his development presale funding requirements or simply to clear out the balance of properties left in a project.

Depending on the number of investors, the size of the development and the motivation of the developer, it’s not uncommon to negotiate between 10% to 20% off the property’s valuation. Again when this savings is realised as equity it can be utilized to continue to grow your property portfolio even during a stagnate property market such as we are experiencing today.

Equity Now provides a buyers agency service assisting clients identify property investment opportunities like those described in this article with a view to helping clients purchase property with an immediate equity position. This allows clients to continue to achieve their property investment goals without being reliant on normal market movements.

For more information please contact:
Greg Morris
0417 716 989