When it comes to property investing, a sound investment strategy is to buy a property that has lost its mojo! A property may have lost its spark because its dated, however with a quality renovation the property could turn into an overnight success for you. I’m sure you’ve heard the saying before, buy the worse property in the best street!
Many of our investor clients have been following this strategy for some time and most have made a small fortune from it! Some clients chose to buy, renovate and hold. Whilst others buy to renovate and flip for a profit.
I’m a strong advocate of buying to hold as property is a long term proposition (if you want to create massive wealth in a predictable way), however there are times when flipping property can make sense. In my view you should only sell the property if you bought the wrong property in the first place!
Whatever your preferred approach, a common question that comes up is how to fund the purchase and the renovation. The best approach is to use equity from your home or from your other investment property (or properties).
To illustrate, here is a typical scenario for a $500k investment property purchase with a renovation budget of $30k. The property is purchased in Melbourne via a reputable Buyers Agent.
Purchase price $500,000
Purchase costs $28,000 E.g. Stamp duty
Buyer agent success fee $11,000 Assume 2% (plus GST)
Renovations $30,000 Estimate
TOTAL REQUIRED $569,000
Mortgage 80% $400,000 80% LVR gearing strategy
Your contribution $169,000*
TOTAL FUNDING $569,000
* The $169k required contribution can be sourced by borrowing against your home equity or equity currently held in your other investment property (or properties).
In other words, the contribution of $169k consists of the 20% deposit, government purchase costs, buyer agent success fee, and renovation allowance. The total sum of this is $169k.
The assumption here is that the client has an 80% gearing strategy (i.e. $500k x 80% = $400k loan).
From a tax deductibility perspective you have two loans ($400k and $169k). Interest paid on both loans is tax deductible against the rent received from the property. This is the case even though the $400k loan is secured against the new investment property and the $169k loan is secured against your home or investment property. It’s the purpose of the borrowings that determines the flow of tax benefits as opposed to the security used to support the loan.
Whilst there are other methods for financing renovations, the above strategy is the most cost efficient and easiest to finance.
A proven strategy to create wealth safely through property is to leverage your equity into more property (as shown in the example above). Your borrowing equity is key as well as buying the right property!
Disclaimer: You should consult your financial and taxation advisers before determining if this strategy suits you.