Purchasing value-add properties is an excellent way to increase growth on your investment regardless of the movement of the market. But what is a value-add property? These properties are dwellings that allow investors to manufacture equity through renovations. Unlike other assets such as stocks or bonds, property is a physical and tangible asset. This means its value can be dictated by its physical condition. Buying a brand new or renovated property can be advantageous. There are fewer maintenance concerns and you may demand a premium in rent. However, if you are willing to get your hands dirty finding a diamond in the rough may allow you to build equity straight away.
What to Look For?
There are numerous things to consider when looking for a value-add property. Firstly, consider if a property can have an uplift in value by a simple cosmetic renovation. Sometimes an owner is not willing to spend more on the property before taking it to the market. This means they list the property below its potential value. This creates a powerful negotiating tool and can turn off some buyers. However, this also creates an opportunity for a savvy investor who can think outside the box. In some cases, a simple paint job can freshen up a property and make the property look brand new. Identifying value adds features of a property isn’t too difficult you just need to know what to look for.
If you are looking at taking it to another level, you may want to consider how you could reconfigure a property to add value. For example, if there is space to add a bedroom or bathroom to uplift the value of the property. Sometimes removing a wall can make a smaller home into an open-plan living space increasing desirability. In many cases, buyers can miss the opportunity to pick up a bargain if they don’t think outside the box and get creative. You don’t need to wait for the market to move to see a property rise in value. Adding value to a property can uplift the property and improve its valuation. Understanding the numbers behind the property and what you can do to add value can go a long way.
When able to identify properties with value-add potential an investor has the ability to add a lot of value by spending a smaller amount of money. Take the following case study for example:
A property in a high owner-occupier leafy suburb was listed for $350,000. Comparable properties were being sold for slightly higher prices within the last few months. There was interest from some buyers, but the property required numerous cosmetic alterations which turned away buyers. After a couple of weeks, the property was reduced in price down to $325,000 to reignite buyer interest. At this new price point, investors and home buyers began to place offers on the property. A purchase price of $325,000 was accepted and the property went under contract.
After completing a building and pest inspection the property revealed it needed numerous renovations to make the property rentable for a potential tenant. Using the building and pest report the buyer was able to knock down the purchase price by an additional $8,000 taking the property to a purchase price of 317,000. The property would then settle a few weeks later and the new owner spent approximately 15,000 in order to complete the renovations. This took their initial investment to $332,000.
The property was then in a presentable condition to rent in which the property achieved $400 per week in the current market. Then, the property was re-valued by a local real estate agent and their opinion was the property would be worth $385k in the current market (similar properties were being sold for around $400k). This would equate to 16% capital growth from the purchase price within a few months. The market has likely moved less than 5% so the property had over 10% value add potential. Not only this the property is now achieving a rental yield of 6.27% (excluding expenses). This goes to show how adding value to a property can be extremely rewarding for an investor if they are willing to do the work.
What to Consider?
It is clear that value adds properties have a lot of benefit to an investor if executed correctly. Though, consider the following before purchasing:
- How long will a renovation take place?
- How much capital will it cost?
- What value will I add to a property?
Failing to take these considerations into account can cost time and money. Not all properties that require work have value add potential. Moreover, properties may still be in good condition and still have value add potential. Consider each property deal in a case-by-case scenario. While the investor needs to have an understanding of what return it may elicit.
Value-add properties are a great way to add instant equity into a property. Value-add properties provide great opportunities for investors to make money without waiting for the movement of the market. This approach is not for all investors and requires a sound understanding of a particular market. If you have the knowledge and are willing to take on a more active approach purchasing value add properties can take your portfolio to the next level.