Forums / Property Investing / Creative Investing / How to grow an investment portfolio with limited Equity

2019 Cash To The Max Workshops - Positive Cashflow and Capital Growth
Viewing 17 posts - 1 through 17 (of 17 total)
  • Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    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.

    • This topic was modified 3 years, 4 months ago by Profile photo of Corey Batt Corey Batt.
    • This topic was modified 3 years, 4 months ago by Profile photo of Corey Batt Corey Batt.
    • This topic was modified 3 years, 4 months ago by Profile photo of Corey Batt Corey Batt.
    • This topic was modified 3 years, 4 months ago by Profile photo of Corey Batt Corey Batt.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of PetePete
    Participant
    @pjewitt
    Join Date: 2015
    Post Count: 50

    Great strategy (if you have the skills and time).

    Profile photo of David SiacciDavid Siacci
    Participant
    @david-siacci
    Join Date: 2014
    Post Count: 14

    At the last couple of Vendor Finance Association meetings this strategy has been a hot topic. The difference being the property is not purchased, maximizing profit by not paying stamps and giving more leeway for the numbers. Why buy when your goal is to onsell in the short term….

    Profile photo of GuyGuy
    Participant
    @guypuls
    Join Date: 2015
    Post Count: 1

    Good option, What about for people that have big savings, do they put a big deposit on one property and use the equity to buy a few more? Or should they split their savings in separate deposits?

    Profile photo of SergSerg
    Participant
    @serhiy
    Join Date: 2015
    Post Count: 1

    How to make this strategy real without purchasing the property to avoid paing stamp duty?

    Profile photo of EthanEthan
    Participant
    @ethan2015
    Join Date: 2015
    Post Count: 7

    How to make this strategy real without purchasing the property to avoid paing stamp duty?

    Ask Rick Otton (IMHO, this path comes with moral hazard and is not recommended)

    Ethan | Terrapodean - Make Home Happen
    http://www.terrapodean.com.au
    Email Me

    Special offer for Forum members: use Coupon 'propertyinvesting.com' for an 18% discount!

    Profile photo of TravisTravis
    Participant
    @oztravis83
    Join Date: 2016
    Post Count: 1

    We already own a property that is starting to wear out after years of tenancy I beleive a renovation will be on the cards soon. Thanks for a guideline.

    Profile photo of BuyersAgentBuyersAgent
    Participant
    @knightm
    Join Date: 2005
    Post Count: 313

    Good option, What about for people that have big savings, do they put a big deposit on one property and use the equity to buy a few more? Or should they split their savings in separate deposits?

    Hi @guypuls there are a range of ideas on this, and as always check with your own accountant, legal and financial experts, but it depends on several factors. If close to retirement and you want cashflow now, then less leverage, higher yield, put the cash into the property so you can live on rent. If not close to retirement and seeking max gains – then you really should try and max your leverage. Smaller deposits, larger loans, more properties. and keep more cash aside as buffers to keep things safe. Just my opinion but the whole deal with property is it goes quicker with bigger numbers and more leverage. You do have to have a safety plan though so don’t go silly and borrow just because. You have to know you can service, and you have to have a plan on what you buy and where/when plus any value add accelerators like reno or development to ensure you get the desired result.

    BuyersAgent | Precium
    http://www.precium.com.au
    Email Me | Phone Me

    South Coast NSW Independent Buyers Agent - Wollongong to Batemans Bay and Regional NSW

    Profile photo of fxdaemonfxdaemon
    Participant
    @fxdaemon
    Join Date: 2013
    Post Count: 113

    Hi Corey
    I have an old house for few years of which equity has grown quite a bit.
    If I organise LOC to finance a reno, is that considered capital improvement?

    – If so, will it be better to consolidate the original loan and LOC into a larger loan so there is capital cost rebasing for CGT purpose further down the track if I need to sell it?

    – If not, is it possible to capitalise the cost to form part of a higher cost base?

    Thanks
    FXD

    Profile photo of MactierMactier
    Participant
    @flynnmactier
    Join Date: 2017
    Post Count: 2

    Hi there, thanks for sharing this good article.

    Profile photo of DanielAugustDanielAugust
    Participant
    @danielaugust
    Join Date: 2017
    Post Count: 1

    Awesome procedure! What’s more, at the last couple of Vendor Finance Association gatherings this technique has been a hotly debated issue. The distinction being the property is not obtained, expanding benefit by not paying stamps and giving more elbowroom for the numbers as David Siacci said. Much obliged for sharing this great article.

    Property Investment Companies UK

    David Thiu
    Participant
    @david-thiu
    Join Date: 2017
    Post Count: 75

    Thanks Corey… That’s a very helpful article…

    With my next property purchase I am thinking of purchasing run down property, having early access to it prior to settlement for renovation, and then having the property revalued once renovations is completed…

    Ideally I’d like to be able to achieve this via a ‘Lease Option’ strategy to minimise upfront costs of the deposit, the holding costs of the loan, and stamp duty costs.

    Are there any financiers you would recommend over others to achieve this re-evaluation upon completing renovation? Last I heard NAB was the go to bank for this…

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    I did one with ANZ – new valuation done at the day of settlement which come in $20k higher. But many lenders want the borrower to wait 3 to 6 months between valuations and/or increases.

    Also note that giving an option on the property would probably be a breach of the mortgage agreement with the bank.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    Thanks Corey… That’s a very helpful article…
    With my next property purchase I am thinking of purchasing run down property, having early access to it prior to settlement for renovation, and then having the property revalued once renovations is completed…
    Ideally I’d like to be able to achieve this via a ‘Lease Option’ strategy to minimise upfront costs of the deposit, the holding costs of the loan, and stamp duty costs.
    Are there any financiers you would recommend over others to achieve this re-evaluation upon completing renovation? Last I heard NAB was the go to bank for this…

    I’d say you’ve probably been reading too many books from ‘property experts’ which are overcomplicating your strategy and for what ‘benefit’ you may believe you might gain, you will restrict yourself in every other way limiting your ability long term to grow.

    If you try to do a val immediately after renovation/settlement you will find the valuers will only note a nominal increase in value, short changing yourself potentially 10’s of thousands.

    If you’re thinking you can renovate prior to settling and use the higher valuation for the purchase to reduce your deposit – think again. The lenders all have rules that they take the lower of the purchase price OR valuation – so they will just revert to the contract price.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    David Thiu
    Participant
    @david-thiu
    Join Date: 2017
    Post Count: 75

    I did one with ANZ – new valuation done at the day of settlement which come in $20k higher. But many lenders want the borrower to wait 3 to 6 months between valuations and/or increases.
    Also note that giving an option on the property would probably be a breach of the mortgage agreement with the bank.

    Wow.. That’s quite impressive Terryw!

    What did you to to add value to your property prior to settlement?

    Interesting point about the ‘Option’ being a breach of mortgage agreement with the bank.

    Are there any ways the owner of the property is still able to provide the seller with an Option to Buy their property at an agreed price, and within a certain date without breaching their agreement with the bank?

    I’d say you’ve probably been reading too many books from ‘property experts’ which are overcomplicating your strategy and for what ‘benefit’ you may believe you might gain, you will restrict yourself in every other way limiting your ability long term to grow.
    If you try to do a val immediately after renovation/settlement you will find the valuers will only note a nominal increase in value, short changing yourself potentially 10’s of thousands.
    If you’re thinking you can renovate prior to settling and use the higher valuation for the purchase to reduce your deposit – think again. The lenders all have rules that they take the lower of the purchase price OR valuation – so they will just revert to the contract price.

    Sure have! :) I’ve been going through the Sciacci System for Vendor Finance, watching Mark Rolton Videos, and now going through Cherie Barber’s Renovation course.

    So what you are saying is there is no point in renovating prior to settlement because the valuation will be based on purchase price.

    But what about if you buy the property under a 6 month lease option agreement for say $250,000, renovate during that period and then onsell that option agreement for $330,000 – would that work?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    With units it can be easier to get the valuations up because if another sells in the same block the valuer has a direct comparable. But this wasn’t me but a client of mine.

    I know of no way to sell an option on a property and not breach the mortgage agreement, unless you notify the mortgagee. Same with caveats being lodged.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Ben
    Participant
    @benmstarlinesecurity
    Join Date: 2015
    Post Count: 14

    Excellent strategy.

    You are correct in everything you said, especially the last part about suitable properties being very difficult to find. But they are out there.

    You just need to keep your eyes open, know what you are seeking, invest wisely but most important be ready and willing to act when you find the right one(s) and this strategy will work for you.

    Act like a snake. When something perfect crosses your path, don’t wait, don’t dither, strike.

Viewing 17 posts - 1 through 17 (of 17 total)

You must be logged in to reply to this topic.