Although this month we are talking about Renovations I thought I would start off by exploring other ways to improve your property without getting your hands too dirty! Let’s face it, spending 6 months of weekends at Bunnings arguing with your partner over the difference between using Chalk White and Natural White paint in the main living area isn’t everyone’s cup of tea! So what are the other ways you can improve a properties equity or value without getting too down and dirty? Here are my top 3 ways to manufacture equity and improve your property without renovating.
Debt Reduction: Get Rid of That Mortgage Quickly & Save $62,000
Wait, wait, wait! Before you go to sleep and think ‘yeah I’ve heard it all’ then you definitely need to keep reading. Remember: Equity is the net value you have in a property, so if you own a house worth $500,000 and you owe $450,000 to the bank, your net equity is $50,000. So to increase your equity you can either improve the value of the property or you can reduce the debt against it – but how?
One simple way is changing your repayment cycle from monthly to fortnightly and using an offset account where you deposit your income to smash down your loan. As there are 26 fortnights in a year you end up making an extra monthly payment per year compared to 12 monthly payments which most of the banks default to.
Practically, this means if you had a $300,000 loan at 5.50% over 30 years, your monthly repayment would be $1700 but if you changed to fortnightly repayments you would be paying $850 per fortnight. This means you are saving approximately an extra $1700 in payments per year, which would reduce the loan term by 5 years and save you $62,000 in interest over the life of the loan. Imagine how many weekends at Bunnings it would take you to manufacture $62,000 in equity?
For more information on ways to reduce your loan, see our article on ‘3 Very Easy Ways to Reduce Debt’.
Strata Titling: Go from one unit to many without moving a wall!
Now this isn’t necessarily something you would do to your home, but there are lots of older style units where there were multiple units or flats built in the same complex with individual electricity metres, but all owned on the one title rather than individual lots. An example of this (which I just googled) is 75 Fifth Ave Wilston. The block was built in the 80s and is all owned on the one title by one owner rather than 6 individual titles with 6 individual owners.
Strata titles allow individual ownership of part of a property which is known as a ‘lot’. This is combined with shared ownership in the remainder of the property (e.g. drive ways, foyers, gardens) called common property. Therefore, when you buy a unit in a larger complex (think those big apartment buildings you see around) you are just a part owner in the larger strata, so you will have joint costs like building insurance and management of the common property.
The real benefit of strata titling property is being able to sell the property in parts. In the case above you could divide the 6 units into 6 individual lots, being 4 x 2 bedroom apartments, and 2 x 1 bedroom apartment which would be worth more than 6 apartments on a single title. The pitfalls of these types of transactions are most banks will only lend between 60-70% LVR on the initial purchase where all 6 units are on the one title, but then once they are strata titled normal lending criteria applies where the individual 6 owners could potentially borrow up to 95%. This means you will need a fair amount of capital or cash up front to complete the initial purchase, as well as have funds to get the strata titling completed.
Sub-divisions: If done well, it can be like strapping a rocket to your wallet
Another common structure we see is the old splitter or small subdivision. I’m not talking about doing 300 lots 100km West of Sydney, I’m talking about infill projects closer to the city where a property might be on an 800m2 block of land which can be split in half (or sub-divided) without having to move a house.
In Brisbane, for example, if you have an 810 m2 block and a minimum of 20 metres street frontage (assuming LMR zoning), then you could potentially cut the block into two 205 metre squared blocks with 10-metre frontages. This fits in directly with the Brisbane town plan small lot code. You can find out how your property is zoned by looking at the Brisbane City Council’s website and see what you can do with your property.
As an example, we had a client that subdivided a property within 15 km of Brisbane 2 years ago. The purchase price of the property was $400,000, the cost to subdivide was approximately $50,000 (including council and operational costs like water metres) putting total costs at $450,000. Each block sold for $290,000 so a total of $580,000 making the total profit $130,000!
All in all, there are lots of things you can do without having to get your hands dirty! With all of the above scenarios, you need to work with professionals that specialise in these style of improvements. Because the biggest mistakes I have seen happen when clients have worked with the wrong professionals. Ranging from architects and town planners that aren’t familiar with the local area, to mortgage brokers that do not understand how to fund renovations and multiple properties on one title. At Red & Co, we are specialists in Home Improvement and Development Finance, so feel free to get in touch with me directly on 0421 874 357 to discuss your project or scenario.
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