Is a $500000 instant equity deal worth it if onselling prospects aren't too good

Hi Woohah,

So the question is, Is equity worth it if the immediate on-selling prospects aren’t too great?

Were you planning to on-sell it soon – e.g. a flip? Or does it have a role to play for you as a renter first? Does it have reno capability, or subdivision? Do you have the funds to accomplish those, and does this fit with your goals?

It sounds like quite an opportunity on the surface. Using some figures as an example, let’s say you are purchasing a property for $200k and it would be worth $300k (50% equity increase, yeah?) You will have costs to buy it, and costs to sell it (inc CGT) if you suddenly needed to sell it. You may well need to discount it to sell again (much like the previous seller is doing, allowing you to buy cheaply).

How much would you need to discount it if you had to sell? Run the numbers – there are one or two possible surprises in there for you. One of these is the fact that you are buying with a 50% uplift, but it would only need to drop 20% or so on a resale to have you in serious trouble.

e.g. Sell a $300k house at a 20% discount = 300 – 60 = 240k Then subtract buy and sell costs, RE comms, any CGT, borrowing costs, etc and that remaining $40k could disappear quickly, even into negative territory.

Look for ways where you DON’T have to onsell it – will it pay for itself as renter, leaving you the Equity to draw against for other opportunities. It could be a great deal – but, as you have done, be sure you understand your Exit plan before buying.

Great question,

Benny

PS I just paid more attention to the Title – seems you are looking at half-a-million profit? Wow !!
If that is right, then that changes my figures in the example SUBSTANTIALLY, and perhaps even the whole message !! Anyway, it should give you a guide – and keep in mind that Stamp Duties on purchase can climb ferociously as the values go up. Take special note of these duties in your State !!

It could also amplify any discount you may need to apply if you need to on-sell it quickly (fewer buyers can afford these higher-priced deals, so you are likely in a marketplace with other investors who will be sharpening their pencils before buying from you.

Re-doing the numbers:- Buy $1m, gain 50% = $1.5m Now, if re-selling quickly, a 20% discount brings you back to $1.2m. This leaves $200k to hopefully cover all buy/sell costs (esp Stamp Duties), RE agent comms, etc. There may even be a little left for you. But watch the discounting carefully – your 50% gain only needs a 30% loss to have you underwater !!

Terry makes a good point. The value of an asset is only what the market will be willing to sell in a reasonable time. If you cannot sell it for that price, I’d hazard a guess that it’s true value may be somewhat less.

If the asset lacks liquidity, but the banks still value the asset to allow you to leverage the equity you create, then its not a deal breaker.

My focus to date has been to ensure my next investment, yields enough outcome to get me into the following one. I prefer paths where selling down the market share is not required, rather leveraging the equity I create.

Does the deal yield this result? If not, there’s not much point to creating a book based equity position if you can’t use it to continue your portfolio development.

I’d think like Richard. We should all know that money in property is usable. Doesn’t have to be in the bank, it’s just different. Selling I wouldnt worry. Servicing I would.