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Empower Wealth Blog post by Empower Wealth

Questions you should ask yourself when adding value to a property

Many investors start out with ideas about creating value – or better still; manufacturing equity….The questions we have for them though are diverse.

What level of renovation or improvement does the investor have in mind? How hands-on does the investor plan to be? How long will the works take? Will the works cost the investor vacancy periods? Are the improvements going to boost up rental returns? Will the resultant improvements allow the investor to purchase a subsequent property in a shorter period than planned? Is the investor risking overcapitalisation? Most importantly; what is the investors motivation longer term?

 

If the motivation is to make a fast profit, more homework needs to be done.

Our philosophy is generally that of ‘Buy And Hold’. This means that we don’t promote buying, renovating/improving and selling for the purposes of making a profit. We have three fundamental reasons behind this philosophy;

  1. Residential Property investing is one activity which can enable a careful investor to create a passive income for retirement. If the asset is sold before retirement, the investor relinquishes the benefit of the rental income, which (by this stage) could be positively geared.
  2. The cost of ‘trading’ property is generally prohibitive when an investor factors in government stamp duty on the transfer of land and agent’s selling and marketing costs.
  3. We view property as a long term asset. The growth of property, while steady compared to other asset classes, is not consistent month to month (or even year to year) in any given suburb. Property ebbs and flows and in most locations, needs the benefit of a longer term ‘hold’ strategy to yield a strong result if an investor looks purely at capital gains.

 

So when is value-adding a good idea, and what constitutes a good reason for value-adding?

This question is best answered when it is defined. Value-adding can refer to a physical change (such as a renovation or extension) or an invisible change such as a re-zoning, subdivision, or removal of an easement. These invisible changes can make a difference of as much as 30% in value and for some lucky owners, can make the difference between sitting on a large block of adjusted land and sitting on a developer’s dream.

Obviously owning land which is in hot pursuit by a developer can feel like holding a winning Tatts Lotto ticket for some, but how do investors look at what investments they currently hold and make a sensible decision about what improvements to add and when?

There are a few questions when considering improving a property;

  • will the improvements lift the rent by greater than a 5% return on investment per annum?
  • if not, am I getting an equity benefit from my improving?
  • how am I financing the improvements?
  • am I disrupting a good, stable tenant while I carry out the improvements?
  • what does my property manager think?
  • could I make more productive use of my time by outsourcing the work?
  • is there a high risk of project overruns or budget blow out?

There are many elements to successful property investing – and knowing when to improve, how much to change, how to conduct a viable and cost-effective improvement and when to sit tight and simply enjoy the incoming rents is crucial to running a healthy portfolio.

In our experience the best assets are the ‘set and forget’ assets. Steady, long term capital growth is hard to beat. The short term benefit of a capital gain is far outweighed by the long term benefit of a well selected, high performing asset which is given the time it needs to show compounding growth.

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