Manufacturing equity: Don't let the market dictate your property value
August 1, 2014 / Written by Rich Harvey
Every investor wants their property to increase in value - that's a given. The question is: How do you ensure this happens?
Plenty of property buyers are happy to purchase real estate in a prime location, such as a luxury penthouse in the heart of Sydney, and allow the market to do the work for them.
This isn't a bad strategy so much as a slow one. Real estate located in a solid locale that sees high demand is likely to rise in value over time, but it can be a long, drawn-out process.
Then you have to think about the role your loan plays in this. You may have bought a great investment property, but until you pay off your mortgage, it's not fully yours.
By manufacturing equity, you can grow the value of your assets and expand your property portfolio more quickly.
What is manufacturing equity?
Equity is the difference between what your property is worth and how much money you still owe on it. Manufacturing equity is any strategy you use to build more equity.
While making regular mortgage repayments and allowing capital growth to rise will both increase your equity, there are more proactive steps you can take.
For most people, this takes the form of renovations, although this is far from the only option.
Renovating to build equity
It's easy to see how renovating a property can build equity. After all, a home in fantastic shape or that features unique amenities will be worth more than other properties.
However, it's a fine line between making valuable upgrades and wasting money money on remodelling. It may take money to make money, but the last thing you want to do is throw cash away on foolish renovations in an attempt to increase the value of your investment.
Bathrooms and kitchens are always solid areas of the home to focus on. Everyone eats and everyone bathes, so putting some money into enhancing these spaces is a good strategy.
Also be sure to focus on kerb appeal. A spacious bathroom and state-of-the-art kitchen won't do you much good if the outside of your property is an eyesore. Things as simple as a new paint job and landscaping can do wonders for not just the value of your property, but even more importantly, its perceived value in the eyes of potential buyers and renters.
Try to avoid overly expensive or impractical renovations. A pool may sound like a great amenity to include to boost value, but it may end up doing more harm than good. Not only is it an expensive project, but it may also narrow the appeal of your home, as some people will not want to take on the responsibility that comes with being a pool owner.
Other equity building strategies
Renovations are far from your only avenue to explore, however, some of the other strategies at your disposal are much more complex and expensive.
For instance, if you purchase land to buy a house on, dividing it in order to build two properties can increase its inherent value, thereby forcing improved value over what you originally paid.
Besides subdivisions, developing land by utilising it to its full potential with property can quickly manufacture equity. While building a new townhome on an empty block of land will be costly, it will also drastically raise the value of the land itself.
No matter what strategy you decide to go with, it all starts by choosing the right location. Whether you're seeking a home in the inner city or a more suburban property, finding the right land or house is key to making your plan work.
An expert buyers agent can provide you with the local market knowledge and tireless service you need to secure the right real estate at a fair price.