Investors unable to grow their portfolios can instead add significant value by looking no further than their own doorstep, Sally Lindsay reports.
1 April 2023
Higher interest rates, tighter bank lending conditions, the removal of mortgage interest as a tax deductible expense and the Reserve Bank’s loan-to-value (LVR) requirements have made life hard for many.
But while buying new properties is proving more difficult – and serviceability bites when it comes to getting finance – there are ways in which to add value to existing properties while the market conditions are tough. We explore six tips aimed at pumping up the value of your existing portfolio, so you’re ready to invest again when that great new opportunity arises.
Experienced engineer and property investor James Goren has reconfigured, renovated and added value to more than 200 investment properties over the past nine years; 180 of them by adding a bedroom. He says it’s not impossible to add $100,000 in extra value.
He adds the classic investor will just change the carpet and paint the interior and exterior and maybe slightly upgrade the bathroom and kitchen, but won’t tackle any other renovation to add value.
“I realised quite quickly at the start of my property journey, the way to add value was by moving walls, reconfiguring the interior for better flow and adding extra bedrooms so they look as though they have always been there, while at the same time modernising older properties.”
By the time Goren leaves a property, he says it looks brand new. He says many investors want to spend $40,000-$50,000, but in reality that means nothing. An expert renovation will achieve a $3.60 lift in a property’s value for every dollar spent.
The average increase in a property’s value is about $184,000, while the average spend is $70,000. When Goren started out the average spend was $50,000 and for every dollar there was just a $2.80 lift in a property’s value.
Goren encourages investors to do their own numbers and says it will not work for every property. “What makes sense in the way of adding value in, for example, Auckland’s Mount Eden, will not make the same sense in a small town.”
He chooses some difficult projects. In Goren’s latest venture his company took a burnt-out two-bedroom West Auckland house and converted it into a six-bedroom property with council consent, adding more than $100,000 in extra value.
Ilse Wolfe, director of Opes Accelerate, a coaching service for investors of the Buy, Renovate, Rent, Refinance, Repeat (BRRRR) strategy, says just because investors are not buying more properties doesn’t mean they can’t boost the value of their existing portfolio.
Cashflow hacking is her six step twist on the BRRRR strategy, for the biggest impact on the rent and value of a property.
The steps she uses are:
• adding an extra bedroom
• assessing rental options
• kitchen and bathroom makeovers
• replacing fixtures and fittings
• painting the interior and exterior
• and replacing flooring.
Wolfe’s top tip to increase a property’s value is to add another bedroom. “It basically means an investor has bought at discount and is why it’s top of the six cashflow hack steps.
“It’s important to know that a cosmetic renovation – painting and carpeting – will cost an investor about the same as adding a bedroom when it is done right.”
Wolfe says it is not enough to set a budget; investors need to “set” how they want the property to perform when finished, then see if the cost and return is worth it. “In the end it comes down to planning. If the investor doesn’t know what they are aiming for they will just land somewhere.”
When planning a renovation to include an extra bedroom costs can vary widely and it is important to get at least two quotes from tradies, get sensible design advice and not over-spend.
She explains that she is receiving more inquiries from investors who want to know how to get the best out of their properties now their tax and costs are rapidly increasing.
BANK ON THE LAND
The other (often forgotten) benefit of existing properties is land-bank opportunities, says Wolfe. Put simply, this is future development value that sits in the back or front yard.
New-builds are generally optimised for design by the developer. By contrast, older suburbs or existing properties often offer a future bite of the cherry through subdivision or intensification.
“This isn’t to suggest every investor should become a developer, but the future value becomes baked in over time as its surroundings develop,” says Wolfe. “The value additionally serves as a means to sell the backyard and freehold the original rental, boosting passive income.”
Learning the zoning and housing intensification of the local district plan enables an investor to take advantage of this when negotiating a deal.
As councils have had to notify plans for the new medium-density rules introduced by Labour and National, it is now possible to build three houses, each three storeys high, on most sections in the main centres without resource consent. This is of enormous value to investors.
“Offering a vendor a higher price will seem less costly knowing that the site can convert to multiple dwellings or titles in the future. It is the land potential that adds wealth-boosting effects to a portfolio,” she says.
USE YOUR SPACE
If a property is of the right size, constructing a minor dwelling which can be rented out separately can work well. There are a range of options. It might be possible to convert an existing garage into a self-contained flat or a new granny flat could be built.
Costs, consent requirements and utility needs vary in this area. Not only are they dependent on the type of dwelling opted for, but they are also dependent on the size of the property, the slope of the land, whether excavation work is needed or what the council wants.
But there is also room for creativity. These days there is a growing use of smarter, more affordable build processes like prefabrication or container conversion.
Subdivision is another option for investors with large properties. The ballpark figure for creating one new title is around $100,000, excluding construction of services and any development contributions the local council may require.
Property investment mentor and founder of Finax Mortgages and Insurance, Lucia Xiao, says her general rule is to subdivide rather than add a minor dwelling. By adding the minor dwelling an investor only increases cashflow, with little capital growth.
“Say a house’s value is $1 million, adding a minor dwelling would cost about $200,000 and the value increases to $1.2 million.
“By subdividing, the existing property drops in value to about $850,000. A new house at the rear or front would cost about $450,000 to build, including council costs etc.”
Xiao says the value of the subdivided property is about $1 million, leaving a total combined value of $1.85 million after costs of $1.45 million. “The property value and rental income has increased substantially.”
BASEMENTS AND GARDENS
Dunedin Valuations says while basements aren’t common in New Zealand homes, if there is one it can be better utilised to provide considerable extra space in a rental.
Media, rumpus or games rooms are ideal in a below-ground renovation, and even workshops and dry storage areas or perhaps a home office will make a rental more attractive.
A home that flows from an attractive interior to an appealing exterior can be a winner. A deck below one metre doesn’t need consent or a handrail and can cost
Dunedin Valuations says the seemingly insatiable Kiwi desire for indoor-outdoor flow is higher now than ever as people cycle in and out of lockdowns, work from home, and look for relaxation spaces that create a sense of separation.
The Renovation Team’s Goren says having a house with a nice outdoor area puts an investor in a different bracket from the valuer’s point of view: functionality is better, which pushes up the emotional value, which can push up the real value.
CHANGE YOUR LEASE
Cross leases are common throughout the Auckland region. They were first introduced in the late 1960s as a way for property developers to avoid strict subdivision regulations and save on time and costs. However, the implementation of the Resource Management Act 1991 and the Auckland Unitary Plan has essentially made cross leases redundant.
Subdivide Simplified owner Troy Patchett says a freehold property is a much more attractive prospect. Cross lease owners can also benefit from an estimated 7 to 20 per cent increase in property value after converting their property to freehold.
“Many people want to have total autonomy with their land and converting a property from cross lease to freehold grants this,” says Patchett.
His company collates all appropriate documents and reports (drainage, topographical survey, draft subdivision plan), submits a council application, prepares a land transfer plan, executes conveyancing documents and makes an application to LINZ for the new property titles. The cost is usually shared by all neighbours on the cross lease.