If structured correctly, purchasing properties which are then renovated, rented and equity released can be replicated to allow the property investor to grow a substantial investment portfolio from an initially small capital base. There are important considerations for anyone attempting to try this renovation strategy, in terms of property selection and the finance structure.
For any successful renovation-revaluation strategy, it's important to have a strong understanding of the market you're buying into, especially the median value and property type of the area.
Property selection
Buy Below Median Value: By buying below median value, you allow yourself to have a buffer in terms of future valuation potential - as the suburb will have strong sales data to support higher values in the area which the valuer can refer to. The easier we make their jobs, the more successful you will be with your end valuation.
Buy the Median Style Property: The properties that you buy as a property investor need to be the median style for the area. For example, if the average property in a suburb is a three bedroom, one bathroom, one carport configuration, at the very least you want to buy to this standard or greater. Building materials used, age of the property and expected development in the area is also important to factor in as these will also significantly change the type of end value you will achieve - you won't achieve the same result and/or capital growth with a fibro home within a suburb full of double brick houses.
Factor in Your Profit: Make sure that the property you buy has profit factored in from day one. Look at the cost of the property plus renovation costs - you will want the end value of this property to be significantly higher than that cost base, or else you're spending time and money on a project which may break even or potentially lose money.
Buying strategies
Having a buying strategy can assist you in finding the right properties to renovate and getting the best price possible. Strategies will depend largely on the area that you're buying, but are not limited to:
The TLC Project: This is your traditional property type ripe for renovation - it will generally be poorly maintained but with good bones which will value well once updated. You will generally find these are priced well in areas which cater to first home buyers, property investors or lower entry price points as the average buyer is generally deposit constrained - so they may not have the capital available to immediately renovate a property.
This type of strategy is more difficult to achieve below value purchases in higher median areas as renovation projects will sell for small premiums as 'The Block Factor' comes into play - with cash strong buyers willing to invest significant funds into renovation properties to make it their own.
The Distressed Sale: Generally a case of a vendor needing to sell quickly - this can happen for a multitude of reasons. A competitive (but low) offer which guarantees a sale can sometimes be accepted in these scenarios as the seller is aiming more for the property to be sold than holding out to sell for the highest price possible. This property type in many cases can overlap with the above strategy where the seller is struggling to sell their property due to the property condition.
The Mortgagee: The bank has repossessed the property and is now looking to sell it to recuperate their losses. In many cases these sales will be auctions and held during weekdays during the day, leading to low attendance numbers. If the area commonly doesn't have these types of sales, you may find that there is minimal competition for the property and leaves greater potential to purchase a property with significant value built in. Bear in mind that banks do still have an obligation to sell the property for fair market value, so the days of selling to just meet their costs are gone.
Revaluation process - taking out those gains
Once your renovation is completed - the next step in the strategy is to release your equity gain so it can be available for future projects.
Revalue the property: Prior to any application it's essential to have the property revalued by a property valuer. Some lenders will only allow you to have the property valued once a loan application is put forward, so it is essential in this strategy to use a lender which provides upfront valuations (valuations without a loan application). Also ensure the valuation is a full inspection and not a computer estimate, otherwise this will not take into account the work you've put into the property.
Assess the equity available: Once the valuation figure is returned - your broker can assist with letting you know exactly how much equity is available that can be released. Banks require a certain amount of equity to remain in the property, so this needs to be carefully considered.
Apply and release: Have your broker apply for the equity release application. Some lenders will allow you to have the funds released through a simple application - others may require you to find your next renovation project before they will release the funds into your account. Using the right lenders will determine when you can apply to release the equity and start your next project.
How do you achieve the best valuation possible?
After a renovation project, investors will often make common small mistakes which can limit their new valuation's result, costing them potentially 10's of thousands of dollars in equity which could be used towards other projects. Some of the best ways to ensure you maximise your valuation result include:
Make sure everything is complete: It's an obvious one - but after renovating an entire property it can be tempting to leave a few minor things left unfinished and order the valuation. Small works such as an unpainted door, curtains not hung or missing skirting boards can have the valuer note your property as 'unfinished' and have an arbitrary figure removed from your true value - I've seen upwards of $10,000 removed. Anything essential to a property must be completed - kitches, bathrooms through to smoke alarms - leaving items unattended to can be viewed by the valuer as 'essential repair required', which may result in the property not being able to have equity released until completed...
Timing is everything: The way valuers come up with property values is quite simple - they compare your property against other recent sales in the area. They generally assess the last three months of sales but can go upwards of six months should they not find enough comparable properties. If you have your valuation ordered in this time frame, it's quite possible that the valuer will also consider the recent price paid on the property and instead assign a conservative figure. As such it's always advisable to wait at least three months if possible, preferably six months, before the equity release application to gain the most favourable valuation possible.
Structuring finance - ensuring the best chance of success
The key underpinning factor in a renovation revaluation strategy is with the initial lender selection and structure prior to even making a purchase. By carefully choosing the correct lender you can ensure you have the ability to order upfront valuations, release equity and move onto your next project without delay.
There is no one lender for this strategy or any other, so it's imperative to get a strategic lending plan from an investment focussed broker - to ensure your lending is tailored towards pushing you towards your goals.
Original article: http://www.apimagazine.com.au/property-investment/renovation-revaluation-strategy