Sweat Equity – Expanding your portfolio through Renovations
A common issue that a lot of early investors can find in their starting their investing journey is a lack of equity to draw to make their second, third (and so on) purchases.
The standard options for those early investors are either:
- Save for their next deposit (again)
- Wait for equity to gain in their existing property (time consuming)
They may have a deposit in which they have saved for a number of years and the thought of having to go through the process of savings these funds all over again for their next purchase can seem daunting. Likewise waiting for equity to increase in an existing property has no definitive timeline (unless you have a crystal ball), leaving many investors feeling they aren’t progressing as fast as they would like to their goals.
There are other options, the most common I’d like to touch on is renovating. This innovative technique certainly isn’t for everyone, but it can allow those early investors a means to leapfrog quickly into follow up purchases. Through carefully selecting the right properties, planning a suitable renovation and keeping to a set budget many early investors can grow a substantial property portfolio from relatively low savings. Here’s an example:
Let’s say we have a first time investor, her name is Sally. Sally has spent the last two years saving $50,000 to buy her first investment property. She isn’t interested in buying her own house at this time, but instead wants to build an investment portfolio as quickly as possible. Sally can potentially make a purchase of $350,000 using these existing savings – however she doesn’t like the idea of having to then start saving another 50k before being able to make a similar purchase again. Instead Sally makes a purchase of a run-down property in the same area for $270,000, only needing a deposit of $38,000. Then with her remaining $12,000 savings, she then completes a minor cosmetic renovation (painting the property herself, updates the kitchen and replaces the fittings in the bathroom, fixing some minor issues and having the floors sanded etc). After the renovations are complete she then rents the property out and has the property revalued.
Even though the property was recently purchased for $270,000, because the property has had significant renovations completed on the property the valuer is able to compare this property against the recent sales in the area – which based on the condition of the property has a new result of $320,000. This equity gain means that Sally can then top-up her existing investment loan to 90% LVR of the new valuation, allowing $45,000 to be released – enough to purchase another property immediately or supplement with future savings to purchase a higher value property whilst retaining the existing investment.
There is no limit to this strategy, so long as the numbers for each purchase stack up, continual purchases can be made at an accelerated rate allowing substantial portfolios to be grown from humble beginnings. The ancilliary benefits of this strategy can includes potentially higher rental yields (from increased desirability of a renovated property), rolling equity gains and depreciation benefits.
Some of you may be thinking at this time that there has to be a catch? Absolutely. There is a very limited number of properties in Australia which can allow for such short term purchase and renovation strategies, so it’s incredibly important to make sure the numbers for each deal stack up from the point of purchase. Likewise it’s necessary to keep within a defined budget, which to be successful will include building a strong network of trades people and potentially DIYing a lot of minor work – which isn’t for everyone.
To ensure you can successfully implement this strategy it’s imperative to have a strategic finance plan to reliably be able to repeatedly make rapid purchases and release equity from each deal, enabling you to move onto the next property.
If you would like to have a discussion about how to have your finance structured for this kind of strategy, click here to connect with us today.