Renovation By The Numbers
Few things in life can speak as clearly as a mathematical formula. Whether you love or hate math, one thing is true, when you see the formula, you will know exactly how the mathematician arrived at their solution.
And even better? You can duplicate their results if you wish.
Consider, for example, the following formulas. These examples show how a well executed strategy can deliver a positive impact on your investment property yields and cash flow.
Pay particular attention to the different results which were created on the part of the investor. A change of half of a percent may not seem like much – nor even a one percent change, but over time the difference can be substantial.
The Numbers
| Purchase Price | $300,000 |
| $280,000 (Discount) | |
| $280,000 (Discount) |
| Rental Yield | $300pw x 52 weeks = $15,600
$15,600 / $300K = 5% |
| $300pw x 52 weeks = $15,600
$15,600 / $280K = 5.5% |
|
| $330pw x 52 weeks = 17,160
$17,160 / $280K = 6.1% |
Savings of $20,000
Renovation of $5,000
As you can see, a simple discount resulted in a yield increase of one half of a percent – when a small renovation was added to the mix the yield was boosted even higher!
A good rule of thumb is that a property valued at $300,000 with rent of $300 per week, the yield will be five percent. The same holds true for a property valued at $400,000 with a $400 per week rent, etc.
Obviously if the rent is lower than $300 or $400 per week you’d know that the yield is below five percent.
These figures are important because the more we can drive up the yield on your investment property, the better the chance that we won’t have to come out of pocket for the property every month.
Capital Growth
Consider this purchase in terms of equity. When we negotiate a discount of $20,000 below value we automatically pick up $20,000 in equity right from the start.
Add to this the idea that we could conservatively gain growth of five percent (off of $300K) over the next year, giving us another $15,000 in capital growth.
A valuation after improvements (which cost us $5,000) delivers an increase in value of an additional $30,000 which is just a ten percent increase.
So add it up:
| Discount | $20,000 |
| Capital Growth | $15,000 |
| Value Increase | $30,000 |
| Total Gain | $65,000 |
| Less Renovations | $- 5,000 |
| Total Profit | $60,000 |
See what I mean by formulas? Now that you know this formula, go on out there and duplicate it yourself! Imagine the state of your investment property portfolio if you used this strategy many times over!
The math speaks for itself. The more strategies you’ve got in your pocket, the better and two of our favourites here at Positive Real Estate are discount and renovation.
What are yours?
If you want more tips about your Property Investment strategy, book a FREE consultation with one of our expert Investment Coaches to discuss your situation and investing goals.
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