Investment property strategy
Calculating potential future value comes down to: what is the need? What will tenants (families, businesses) require? What will be the demand for property and how might it change? Or even: who might want to put funds into a property project (instead of in an underperforming super fund, for example)?
The answers to these questions provide the answer to your key question: what is the potential rental and/or resale value of this property? The beauty of including this in your initial appraisal of a deal is that you are factoring in the need, demand and potential for added value prior to commitment. You’re working out your exit strategy before you go in.
You need to see the whole picture of your project before you start. When you decide to crystallise the potential of your asset, and who might be the buyer. In the property business, it is vital to focus on the exit strategy at the start and to work towards it. For one thing, an underpinning exit strategy is important when we do our market research so that we don’t over-capitalise on a property. It’s also important in funding, as any financier (especially if you’re going for venture capital or mezzanine funding) is going to want to ensure that there’s a clearly-defined market with room for a healthy profit margin.
Even better: pre-sales. Developments, especially of residential units, can take 6–12 months to complete. A bank or other lender is going to require a percentage of guaranteed or pre-sales. Note that these are not fail-safe: the financial circumstances of the would-be buyers may change prior to settlement, or the market could fall in value. Lenders often cover themselves for these eventualities by discounting pre sales by up to 50 percent. As developers or prospective developers, it’s up to us to have a clear exit strategy, and ideally, a back-up for the worst case scenario.
Solving problems: property subject to flooding
My current four-hectare (10-acre) head office site in Nerang, Queensland was purchased in 1995 for $250,000. The land was zoned rural and under the strategic plan it had the possibility of becoming office, open space and entertainment facility (opportunity). The constraint (threat) was that the site flooded and no one was previously able to get past the flooding problems. This made the land potentially near worthless because people thought buildings couldn’t be constructed on the site.
My solution was to solve the engineering problems and liaise with the council to allow floodwaters to be diverted to an area previously not considered. As a result, the property was rezoned from rural to office and equestrian. The land purchased for $250,000 in 1995 was valued in June 1999 at $1.16 million. And the risk? A refundable deposit of $10,000 which was negotiated as part of the conditional contract of purchase.
Buying time: property without amenities
A property at Hoppers Crossing in western Melbourne is zoned rural and under the strategic plan for the area, it has the ability to be rezoned residential (opportunity). The asking price is $800,000 – and it can yield 130 subdivided lots. Other subdivisions in the area are achieving prices for the same yield of $1.3 to $1.6 million. The threat is that there is no sewerage to the site.
Solution: hold the property for two years on an extended-term contract with the vendor, where he shares in the future profit (no outlay from you). By the time the sewerage becomes available in two years’ time, the property will have increased in value to around $1.6 million.
Identifying the Need
What is the need that your property ‘products’ might fill, thus creating a market for you? In this session, we will look at some broad possibilities – but the important thing will be your awareness. You need to be constantly matching up potential needs and potential need meeting property products as you talk to people and view properties.
We have already considered some of the key needs property can fulfill:
• You may acquire and develop residential property that meets the needs of future buyers (whether residents or investors). If you are looking at developing in a particular area, why not advertise for parties interested in acquiring units or houses in that area, so that you start to build up a database of potentially interested clients?
• You may acquire and develop commercial property that meets the needs of businesses for premises suitability, access to infrastructure and exposure to potential customers.
Why not start contacting expanding businesses to identify where they may be looking for future locations to lease or purchase, so you can begin hunting down sites for them? Think of all the fast food chains, service stations, retail outlets, convenience stores and food outlets – just to mention a few categories – that have a continuing, growing appetite for property.
Broaden your reach
Most Australians don’t know about property investment, financing, tax assistance, rental income or any of the things you have already learned and are learning through this program. What’s the need? Same as yours when you bought this program: other people want to build wealth but they don’t know how. What’s the product? Your growing expertise.
• You already know about passive wealth building. What if you were to suggest to some of your friends that you could identify investment opportunities for them with good land content in good locations, which would bring in tax deductions and rental income? You are doing more than a real estate agent, you are sourcing investment properties. It may be handy for you to be licensed so speak to your local agents about getting a salesperson’s license so you can earn some commission – but it also may be worth your considering charging a fee to your friends or acquaintances to provide this service.
• There are many groups around Australia who operate as investment clubs on this basis: individuals who have got a small investment portfolio, recruit other individuals and charge a fee. Having completed Success from Scratch, there’s no reason why you shouldn’t recruit your own circle of friends and identify opportunities for them, with financial benefit to yourself. However, you should check out with your lawyer whether any licenses are necessary for your specific intentions.
• Or how about identifying four friends who are looking for an investment property – the newer the better (if they know anything about the tax benefits). You could find a site and build four units, with a pre-commitment that your friends will buy them from you on completion.
• What’s the need? You’re offering them investment properties with 100 percent of the building tax deductible and the potential for rental income. If your friends earn over $50,000–60,000 per year and are paying $20,000 in income tax, you are also offering them an immediate tax reduction. Explain the structure to them: help them to build wealth while you build wealth.
• Mindmap your business contacts: who among them may wish to purchase their own premises? Doctors, dentists, chemists and other professionals value their working environment. Could you put together a group who will agree to purchase their own premises using their superannuation funds or the debt-servicing potential of their sizeable incomes on the basis that you are the one to find and develop the site, with a pre-commitment from them to buy from you?
What’s the need? These professionals are currently paying rent which is going to increase with inflation on an annual basis. They are generally paying the commercial landlord a return of 10–12 percent – so if they owned the premises, borrowing at 7 percent, their costs would go down overnight! What’s more, the rent they are paying the landlord goes up by 3–4 percent per annum – without them reaping any of the capital benefits. By owning the premises, they could lock in their payments for five years on a fixed interest rate: as the business grows, the overhead drops.