Property: Create Instant Equity

What better way to increase your net worth than create some instant equity in your property.

We have compiled our experiences, along with the experiences of our clients and social circle to narrow down 5 most common ways kiwis are creating instant equity, known as the R&D "BREMS" principle.

BREMS = Buy low, Renovate, Extra bedroom, Minor dwelling, Subdivide

These are tried and tested methods that have worked exceptionally well in the New Zealand market, and will most likely thrive in a lot of major cities around the world; with some required variations to suit each market.

So without further delay, let's explore each of these methods.

1. Buy low

By far the easiest of the 5 methods from an effort and cost perspective. Buying a property for less than its market price is an effortless way to increase your net worth. Some ways to do this include strong negotiations, buying directly from the vendor (no real estate agents), buying a new development at a discount, buying from desperate sellers - deceased estates, divorce settlements, vendors migrating overseas or vendors who need to settle on a new purchase.

You can also negotiate a better price by pointing out a lot of issues with the property. Most people do not realise that they can negotiate on price if they find issues in the building report. Usually at that point the vendor has waited almost 2 weeks since the agreement and may agree to reduce price to go unconditional. NOTE: these need to be genuine and reasonable concerns raised in the building report.

Some others choose to go the other way and offer to go unconditional and settle earlier if they receive a discount. This works really well with desperate seller especially if they are waiting for the cash from the proceeds to pay elsewhere.

Remember the old saying "You make your money when you buy, not when you sell".

2. Renovate

Cosmetic renovations give a fresh lease of life to the property and increases the property values in the tens of thousands of dollars. My most recent discussions with some renovators (at the time of writing), suggested that an average 3 bedroom house cost $45-$55K for a full renovation in South Auckland, and is expected to fetch an increase in valuation of around $80-$120K. Other parts of Auckland would probably have a similar quantum of increase.

Now imagine the profits you can make if you can get "mates rates" on a renovation, or if you can DYI parts of the project, say painting or removing old carpet.

NOTE: The numbers mentioned above is for example purposes only. The cost and profitability of each property will depend on a number of factors. We highly encourage everyone to do your numbers thoroughly before committing to any renovation project.

3. Extra Bedroom

As a general rule of thumb, other things being equal, a house with more bedrooms will have a higher valuation than a house with less bedrooms.

Two common ways of adding an extra bedroom include: (i) extending out and adding an additional room, or (ii) a more cost efficient way is usually carving out a new bedroom out of existing large rooms within the house.

Again looking at the Auckland market, a lot of houses built around the 1940s - 1970s have much larger living areas compared to the 3m x 3m lounges we see in new builds today. Adding some non-bearing walls and a door will easily give you that much needed extra bedroom and will be a more efficient use of space.

We do suggest that you speak to your local council before carrying out any alternations to be on the safe side, even though some alterations may not need formal council approvals and plan submissions.

4. Minor Dwellings

Minor dwellings or granny flats are a common sight these days with property owners erecting a new building in the backyard. These are usually 60 square meter, 2 bedroom units that fetch a good rent for the owners.

The recent Auckland Unitary plan is very helpful in supporting this type of development, allowing for a better use of land space whilst supporting cashflow and valuation. Again it is best to speak to local councils first for any development projects.

5. Subdivision

Similar to number 4 above, the Auckland Unitary Plan is favourable for sub-dividing land that was previously not possible. So if you are sitting on a big backyard, it may be worth to check your zoning on the council website, or speak to your local council or an architect.

Subdivisions are great as they provide separate titles for each piece of land, so you can individually sell them. This usually allows you to achieve a higher total sell price by selling each piece of land separately.

Secondly, separate titles provide you with the flexibility to sell only part of the original land, and hold the remainder to build your long term portfolio. This is an effective technique used by a number of investors who buy an old property with a large yard, build a new 5 bedroom house in backyard (or front yard), subdivide into 2 lots and sell the new house. The proceeds from the sale is used to pay down the mortgage and renovate the older house.

The older house with cosmetic renovations is now ready to be marketed to get interest from quality tenants. Read number 2 above on other benefits of renovating.

Disclaimer: The content of this blog or anything else on our website contains general information only and it should not substituted for financial advice or specific advice. R&D Accountants and Analysts (RDAA) Ltd do not accept any liability whatsoever relating to losses or damages arising from reliance on the contents of this blog or anything else on our website.

RDAA Ltd strongly recommend that before a reader undertakes or implements any financial, investment, taxation or business decision flowing from information or content of this blog or anything else on our website, they procure professional advice from a suitably qualified adviser, on which they may rely on their specific opinion. Such advice should be comprehensive in character and appropriate to the individual's personal circumstances and financial affairs.

#property #instantequity