Investing in property offers exciting opportunities for wealth creation and financial growth. While many investors focus on traditional strategies like capital appreciation ticking, there’s another approach that can significantly accelerate returns. And that’s by ‘manufacturing equity’.
In this quick read, we’ll answer what ‘manufacturing equity’ means and what are the common ways this is done. We’ll also explore common pitfalls to avoid and things to check for to avoid buying a lemon/money pit on property.
In simple terms, to ‘manufacture’ is to ‘build’ on the value (or equity) of a home (or asset) by doing ‘works’ or ‘applying strategies’ to add more value to the home. This is done (but not limited to) the following five ways property investors manufacture equity..
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The most common and thought-after way to manufacture equity is by buying properties below their market value. This is primarily done in three ways, (1) buying under-market thanks to careful research, negotiating skills, or identifying distressed properties or (2) buying in a ‘buyer’s market’, especially when demand is in the early days of picking up pace. And finally (3) buying off-market. This can sometimes result in a equity boost as you purchase the property less the selling agency fees putting more money in both the buyer and seller’s pocket.
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Another common method, whilst being a lot more involved, is manufacturing equity through renovations. This can be done from minor cosmetic changes to major structural renovations, these improvements can significantly increase the property’s worth. Do watch your cost though, especially during everchanging costs in the labor/material market.
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A less common approach that will require professional counsel is manufacturing equity through the land use change or zoning changes. Although this may come with significant upfront fees, this approach can be astronomically positive on the ledger. A common land use change is turning a residential property into commercial use or regional zoning into residential.
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Another approach that could act as a short or long term play is manufacturing equity through subdivision of land or my personal favorite, retaining the house and also building out on the subdivided property. This approach ensures rental income is flowing through whilst building out another new property on the lot (through battle axe configuration or side-by-side freestanding dwelling).
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Finally, the last common approach to share is manufacturing equity through a home layout change. This is done in the form of a renovation that focuses on adding an additional room. This generally bumps the property into a higher sales bracket for a given suburb as well as enhances rental appeal and rental income of the home. Please note, this can also be done sometimes by adding a shed or even a pool to the premise as well.
Buyer beware though, without doing your homework, you could fall into costly pitfalls. To mention the most common ones, here’s a list of some of those pitfalls that can hinder your success.
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Not choosing the right approach based on your cash flow position: When factoring in the right approach to take for manufacturing equity, you need to consider cashflow. For those that are low on the cashflow front, you may steer away from a subdivision project and opt for a renovation. Careful consideration is key.
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Timing implication to deliver on approach: Renovations can be drawn out impacting your ability to incur rental income. Especially if you have a mortgage on the home and you’re currently renting. Funds can dry up quickly. Do factor in the time to deliver, have a money buffer and plan accordingly.
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Misunderstanding the market value: Failing to accurately assess the market value of a property can lead to overpaying or underestimating its potential for equity growth. Especially if market value for a property is hindered due to a major structural defect. The good news is you can easily mitigate for this with a building and pest inspection.
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Overestimating renovation costs: Poor cost estimation for renovations can eat into your potential returns. It’s crucial to have a clear understanding of the expenses involved and to budget accordingly. Especially with the current climate of costs, consider labor and material cost changes as part of your evaluation.
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Neglecting local zoning laws: Ignoring local zoning laws can result in costly legal issues and delays. Always ensure your planned renovations or changes comply with local regulations.
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Overlooking the potential for increased rental income: Neglecting to optimize rental income through effective property management and market research can limit your ability to generate additional cash flow. To manage this, local property managers will have a better and more realistic assessment of the market and you can do your own research through oldlistings.com.au.
Manufacturing equity in property investment can have overwhelming benefits, especially if you’re starting out, and can be the right kicker you need to set your property portfolio into good stride with equity you can reuse to purchase more properties. However, in the property space, mistakes can be very costly, so do ensure you do your homework. You can also reach out to experts such as a Buyer’s Agent who has achieved these results for prior clients and has the contacts. By understanding the different methods available and avoiding common pitfalls, you can better navigate the world of property investment. So, the secret’s out! Embrace the potential of manufacturing equity and embark on your journey toward financial growth and prosperity.
Note: This blog post aims to provide an overview of manufacturing equity in property investment. Always consult with professionals and conduct thorough research before making any investment decisions.