An introduction to the three pillars of Money Making in Property
Here are the 3 basics you should look out for when you’re buying an investment property.
Instant capital gains.
What does this mean? It’s basically finding a house that is under the market value and you know maybe the person is selling for urgent matters and they are taking whatever price they can get and you get instant capital gains. This is buying below market value.
The second way of making money in investment property is adding value. Methods such as do ups, adding a bedroom to increase the rental income, subdividing a section, adding a minor dwelling etc. There are many ways to add value to the property.
Third one being cash flow, looking for properties that will cover the Mortgage and the cost of having that property from day one, or shortly thereafter. While this is difficult to achieve with most property in Auckland, houses that have a separate dwelling or living space will often be able achieve this. You may need to look further toward the outskirts of large cities, the regions, or less desirable areas within larger cities.
Applying the 3 Pillars
Instant capital gains
The first example I am going to give you is instant capital gains. So, over here these two properties are in Mont Wellington just one minute apart. What I am going to show you here is that why they have a massive difference in price value. Both properties are very similar and if you look at the details in this little box they have the same floor area, they have the same size land size and they even have a very similar location. Why is the rating valuation so different?
The biggest difference is actually the material. With every property, there are two values that you need to look at. One is the land value, the second one being the improvement value or the actual house itself. You can see that the land value is about the same for these two properties, but the biggest difference comes from the improvement value. The reason for that is in the first house you can see that it’s roughcast and the second one is brick. In actual fact, the first property is Plaster over brick and for the government to value that at a lower price it’s actually undervalued and if the vendor or the agent do not know any better you will get a great bargain.
The second way of adding value is to buy a property which needs a little bit of TLC. In this example, the bank valued this property at $670,000, the client topped up and spent $40,000 doing up the kitchen, installing a modern bathroom, doing some general maintenance around the house and revamping the backyard. After these renovations, the value effectively increased to $750,000. So, for the cost of $40,000 they made an extra $40,000. Increasing accessible equity from $40,000 to $64,000.
Another common way of increasing value is finding older properties that are relatively spacious. In the 1930s the kitchens were built in a separate room. If it’s positioned correctly you can turn this into a bedroom and put an open plan kitchen in the lounge. Not only will this increase the value of the property, but you will also instantly increase the rental income yield by 15 – 20%.
Your third option is cash flow. This strategy is a lot easier to understand. Basically buying something on day 1 where the rent is going to cover the whole Mortgage. Back in 2014 one of our clients found a property that had two units on one title. So what does that mean? Effectively you are buying two houses at a massive discount. He was able to pick up the Hillsborough property for $880,000. He was able to achieve a rental income of $1,160 after some minor renovations giving him a return of 6.8%. This effectively covered off the mortgage from day one and it was valued in 2017 May at $1,480,000.