Had my 'aha moment' and was wondering if it's as good as I hope!
At the conference, Steve was talking about how increasing rent increases the value of the property. The example he gave from a deal he had done was;
Rent Yield Value
$20k 7% $285k
$30k 7% $428kHe started talking about ways to add value to the property to justify a rent increase. So I thought if increasing the rent by $10k increases the value of the proprty by $143k, why not just give the tenant $10k?! That way you have massively increased the value of the property and created extra equity for a relatively small sum and simultaneously keep your tenant happy as there's no extra rent to pay.
I can imagine there's legal and tax implications regarding 'donations' to tenants (although a quick Google search didn't return anything) and maybe this idea in general but surely there could be a way around it such as subsidising the tenants rent.
Just thought I'd ask seeing as it could be a very cheap way to create a nice amount of instant equity that could be used elsewhere with the profits paying off the tenants yearly $10k.Derek
Despite the ethical implications of why you would want to be artificially increasing the property’s value, there are many other practical problems.
Firstly your idea is quite common in Commercial Property transactions with unscrupulous vendors and uneducated buyers. The method used to calculate commercial property is the, income capitalization method. This is what Steve is talking about. However, most sophisticated commercial investors check the lease clauses and contract periods as well as comparative letting rates nearby. However, I have heard on many occasions where people have pulled this ‘con’.
In residential property the two most common valuation methods are comparative market analysis (CMA) and cost plus estimation. Both of these valuation methods are not influenced by the income produced by the property. Therefore, I doubt increasing rental yields artificially will have a big impact on price. Remember, even if you are to ‘sell’ the property with the main feature of a 20% rental yield, the bank guaranteeing the loan is going to get a valuer to do a CMA and then your deal will be blown out of the water…
There's many, many flaws in your plan, but at the very least, 20k p/a is around $385 p/w, and 30k p/a is around $575 p/w, so your plan relies on anyone who matters (purchaser/bank/whoever you want to trick here) not realizing that the rent is $200 p/w above market value with no justifiable reason.
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