How can you proactively add significant equity to your investment property without building or renovating?
Read more to find out how one of our clients took less than six months to do just that.
Property Investment Strategies: How to proactively add significant equity without building or renovating
Last year, a client approached us with the intention of demolishing their property located in Melbourne’s South East, and replacing it with three brand new double storey luxury Townhouses.
By the end of the year, their circumstances had changed and they decided not to complete their project.
Yet within six months and without any building works, they added $90,000 equity to their investment property.
How did they do it?
The secret is: The Planning Permit.
A Planning Permit is not just for developers – it is an advanced tool that investors can use to add significant value to their investment property in and of itself.
Why would a Planning Permit add value?
A property with an approved Planning Permit and Plans is particularly valuable to builders because it means that the builder doesn’t need to go through the planning process themselves.
Purchasing a property with Plans & Permits means that the builder can very quickly proceed to building (in our 7 Step system, it means a builder can skip Steps 1 through 4 and commence immediately from Step 5). Thus, any property with approved Plans and Permits effectively has a new, secondary market of prospective purchasers: builders.
The converse, is that if you are intending on purchasing a property with Plans and Permits, you might find yourself in a bidding war with builders.
It is important to note that it is only an approved and current Planning Permit and Plans that add value. Merely having plans drawn up (no matter how good they are) will not add any value as there is no commitment from your local council that those plans will be approved. Occasionally such properties are seen on real estate websites such as realestate.com.au and domain.com.au with the letters STCA (Subject to Council Approval). Any statements STCA are an attempt by the real estate agent to add perceived value to the property that cannot be substantiated.
Why wouldn’t a builder go through the planning process themselves?
There are many reasons why a builder would not want to go through the planning process themselves but all of them come down to risk:
- Time risk: A builder might not know how long it will take to obtain a Planning Permit
- Outcome risk: A builder might not be sure that they are able obtain a Planning Permit
- Competency risk: The process of obtaining a Planning Permit could be outside of the field of expertise of a builder
- Opportunity cost: It may simply not be worth obtaining a Planning Permit, given all of the things a builder could spend their time and resources
Thus, a builder would be prepared to pay a premium for properties that have already had this risk mitigated ie. a property that has an approved Planning Permit with Plans.
How much value does a Planning Permit add?
In our client’s example, the subject site was an existing dwelling on a land allotment of over 900m2 located in a prime location close to schools, shops and transport.
The Planning Permit and plans for three luxury townhouses added an approximate $90k of equity to the subject site (each lot contributing roughly $30k).
Note that the exact value added to your property will depend on your subject site, proposed development and local market conditions – do your research (remember Step 2: Strategy?). Speak to your local Real Estate agent, find out what local market conditions are like, what the demand and recent sales activity is like for new townhouses/units and ask for examples of recent comparable sales of properties with plans and permits.
If possible, speak to your bank’s panel valuer (who would be responsible for revaluing your investment property should you go down this path) and ask for their feedback on the additional value that plans and permits would add to your site.
To find out more about the Planning Permit process, read our earlier article – Property Development 101 Step 4: Application.
How does one extract the value of a Planning Permit?
There are two ways to extract the additional equity that a Planning Permit adds to your property:
- Sell the property with plans and permits attached, or
- Have your property revalued with plans and permits attached and draw down on the additional equity.
The second option is particularly attractive for two reasons:
- You can release the additional equity you have created even if you have no intention of selling your investment property
- Drawing down on equity can be tax free* (as opposed to selling which triggers a Capital Gains Tax event).
* Always seek professional accounting/tax advice specific to your personal situation.
UNLOCK YOUR EQUITY!
Contact us to find out how equity in your property can
be unlocked without building or renovating!
Related links
- Read more about the Planning Permit application process in Step 4: Application of our 7 Step Property Development 101 series.
- Read more about the research required to determine if this strategy is suitable for your property – Step 2: Strategy
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