We all want to create Instant Equity!
There are many ways to build equity through property investment, some happen much faster than others. The term Instant Equity is becoming more and more apparent and people are looking to take some extra risks to chase those bigger returns. But what exactly are the risks and what exactly are the returns? Let's take a closer look.
First of all let's make sure we all understand Equity.
Equity is the portion of the property you own. For example, if you buy a $500k property. You get a $400k loan and you put down $100k deposit. The $100k is your equity in the property.
Market Growth
The most well known way to build equity through property investment is waiting for the market to grow. If your $500k property grew to be worth $550k. Your $100k in equity is now actually $150k. Equity increases but debt does not.
However, not all properties grow equally. Not all properties in the same suburb grow equally. If you compare the average price growth between units and houses you will get varied results depending on the location, timing of the markets and the land content.
Debt Reduction
The 2nd most common way to increase equity is to pay down the debt. Even if there is no market growth, when we pay down the debt we increase the equity. Your $500k house may go up by $50k, but if we also pay down $50k in debt. We go from that original $100k equity to $200k. Value going up and debt going down.
Under Market Purchase
Buying a property at a discount rate to the actual market value. This can happen when the vendor doesn't understand the market value of their property or when it is difficult to obtain finance. Sometimes this can come from a distressed sale where the seller needs to offload the property asap. For most people they just get lucky. The right place at the right time.
Develop
Rather than waiting for the market to go up, you can be actively constructing and/or subdividing properties to 'manufacture equity'. It's important to note, you do not need to sell to realise your equity gains.
What are the different ways you can do this?
Duplex
Description: Two dwellings on seperate titles, you can either strata or have their own title with no body corporate. This creation of two individual properties would generally create an equity uplift in a high demand market. Using the premise, you are paying for one block of land and essentially creating two. You can sometimes get the build at a cheaper rate per square metre because you are building both together.
Each dwelling has its own services and car parking with fire separation required and can either be joined (most often) or stand alone. A duplex pair can look like a mirror image from the front with both dwellings looking symmetrical or less obvious on a corner allotment with each dwelling facing a different direction.
Town Planning: These properties are limited to certain areas based on each council's town planning regulations. Land zoned for a duplex is most readily available in regional areas with very limited availability in capital city areas. You will need a development approval before your builder starts construction which can sometimes take 2-3 months (much quicker if you have experts working for you).
Strategy: Suitable for those with a higher budget over $650,000 who want to get a lift in equity higher than a standard house build. Once you have seperate title you have more options with two properties such as selling one to reduce the overall debt, thus increasing cashflow.
Our Typical Locations: QLD, NSW and VIC
Price Range: $650,000 to $900,000
Equity Uplift: Look for 10-20%
Splitter Block
Description: Two lots on one title exist in some areas whereby people originally bought more than one lot and amalgamated them onto one title. These are sold at a 10-20% discount to the individual values of the lots if they were on seperate title. Requires no council approval or the connection of services to each of the lots.
Splitting the lots onto seperate title and selling the lots is most likely not feasible once you take into account stamp duty, demolition and agent's commissions. Unless the agent and vendor have no idea and you get an amazing deal. Selling land also takes longer than selling houses so be prepared for interest holding costs if this is your strategy. What can also sometimes work, is if you can lift the existing house and relocate onto one of the lots and you have a spare lot to develop or sell.
If looking for a splitter lot be ready to act quick. The profitable ones will only last up to 24 hours on the market.
Town Planning: Not applicable for creating into seperate lots on individual title. However you need to comply with town planning when building houses on each of the lots. You can sometimes realign the boundaries of each of the lots to create a better building envelope however you will need to comply with council's minimum lot size and frontage. This is where you need good town planning and building advice on hand before you make purchasing decisions and before someone beats you to it.
Strategy: Depends on what you are looking at doing with the lots. To buy, demolish and sell the blocks, your budget can be as little as $600k. However, expect longer wait times to sell land if you aren't selling at a discount and thus higher holding costs.
For full development including build it is suitable for those with a budget of $1.0m+. You are effectively purchasing the lots at a wholesale price to enable the construction of 1-2 dwellings. No need to wait for a subdivision approval from council before you start construction. The first option is to build one dwelling and sell the remaining lot. The second option is to construct both dwellings and refinance the equity out to use as a deposit on another property or sell one of the completed dwellings and reduce the overall debt.
Our Typical Locations: QLD
Price Range: $1.0m to $1.5m
Equity Uplift: Look for 10-15%
Subdivision
Description: What was once a large block of land with a single house, can be subdivided into 2 or more allotments. Expect this process to take at least 6 months before you have seperate titles for each lot. The price of sub-dividable land should be less than a splitter to take into account the subdivision costs and the time period to complete.
Town Planning: A subdivision does require a development application to be submitted to council and the terms of approval require you to connect seperate services to each lot. When considering the subdivision of a lot into 2 or more lots you will need to comply with council's minimum lot size and frontage.
Strategy: Generally for a good profitable subdivision project it would be suitable for those with a budget of $1.0m+. You are effectively purchasing the lots at a wholesale price to enable the construction of multiple dwellings. You can start construction for one dwelling whilst it is in council getting approval for the subdivision. However, you would need some strong advice and initial discussions with builders, engineers, surveyors, town planners and initial town planning consultation. You will need to wait to complete the subdivision before you can start the construction of the second dwelling. The first option is to build one dwelling and sell the remaining lot once the subdivision is complete. The second option is to construct both dwellings and refinance the equity out to use as a deposit on another property or sell one of the completed dwellings and reduce the overall debt. If there is room for more than a two lot subdivision there would be many other possibilities.
If you own a property and you want to see if it is sub-dividable. Contact us today for an appraisal.
Our Typical Locations: QLD, NSW, VIC
Price Range: $1.0m to $1.5m
Equity Uplift: Look for 15-20%
Equity Build & Display Homes
Description: Building a new house in the right location where the combined cost of the land and build is less than surrounding comparable sales. Some of the best strategies to achieve this are a) building a display home in a new land estate whereby the builder will often include high specifications at cost price and b) building a new home in an established (infill) suburb at a discount to other recently constructed homes.
Strategy: If you are looking at building a display home for builder you will need a budget of $750,000+. Use the high cashflow from the builder leaseback (7.0%-9.0%) to pay down debt and the equity should continue to grow as other new homes and infrastructure gets built within the estate. At the end of the builder leaseback period (2-3 years typically) you can either sell the house for a profit (the house will be in 'as new' condition without a tenant having lived in it) or rent it out to a new tenant at a lower yield (5.0%) and hold for the long term.
If you are looking at constructing a new home in an established infill location then you will need a budget of $550,000+. On completion of the house you can refinance the equity out to put towards the deposit of another property. Creating this equity during the build effectively gives you the equivalent of a couple of years capital growth to enable you to buy another property again sooner. In the long term this strategy will put you years ahead of those property investors who buy at market value, hold and hope.
Our Typical Locations: QLD, NSW, VIC
Price Range: $550,000 to $900,000
Equity Uplift: Look for 10%+
Multiple Dwellings
Description: Constructing your own townhouses or units in a small development (2-4 dwellings). On completion of the project the end value of the dwellings should be higher than the total developments costs. This is called a development margin and is determined by the price of land and the design of the dwellings. Just buying land and building what council will let you does not necessarily mean you will make a profit.
You can buy an existing development site with an approval in place (which may need to be modified to increase profitability) or buy the land and do the development approval yourself. Strongly recommend getting expert help :)
Strategy: Suitable for a more experienced property investor with a higher budget that wants to build equity through small property developments. On completion, you have the option of refinancing out the equity to purchase another property or selling down some of the townhouses/units to reduce overall debt.
Town Planning: Land must be zoned a higher density to allow multiple dwellings. You will need a development approval through council before you start construction. This will take a minimum of 6 months.
Our Typical Locations: QLD, NSW, VIC
Price Range: $1.2m+
Equity Uplift: 15-25%
Conclusion
When 'manufacturing equity' through construction you will always be left with the option of selling and taking a profit or holding for a period of time. This will depend on the market growth in the area versus what returns you can get by starting another project. Or investing in another suburb with higher growth prospects after taking into account selling commissions and capital gains tax.
At the end of the day, small developments are not easy. Buying in a high growth area can be easy but creating equity is not a simple process. If it was, everyone would be doing it.
To successfully complete these kinds of developments on your own you will need to invest a lot of time and you will need a team of professionals to help you. Here are some of the experts you will need at your fingertips on a day-to-day basis:
-Builders
-Engineers
-Architects/Draftsmen
-Town Planners
-Surveyors
-Demolition teams
-Local Agents
-Certifiers
-Experienced Brokers
-Traffic Management
-Solicitors
-Project Managers
As project managers, we take care of everything from start to finish and help ensure all risks are mitigated. Our goal is to have a smooth transition from a potential opportunity to a considerable profit margin for each individual client.
If you have any questions regarding small developments, please don't hesitate to contact us - contact@thepropertyroom.com.au
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