Raising Property Value and How to Pay for It
24 October, 2019 / by
For most people, a house is the most expensive purchase they will make in their lifetime, and aside from the obvious (having a place to live), homebuyers have incomparable incentives to own property. Not only do they secure a home for themselves and their families, but a real estate asset can also be liquidated in several ways: income from rentals, profit from a sale, or mortgage credit.
The key is knowing how to leverage your property in ways that maximize its potential. The asset’s value doesn’t begin and end with its location, and shrewd investment decisions can earn a property owner their capital back plus more.
A popular strategy to increase a property’s value is by renovating, with some improvements being more profitable than others. Kitchen remodels, for example, can add more than 12.5% value to an asset’s selling price. Conversely, swimming pools bottom out at less than a 2.5% additional price contribution; it turns out that most families are turned off by the extra effort and cost to maintain a very expensive non-essential. Investors need to prioritize, making sure that their decision to renovate is based on a sound understanding of the market and not a personal indulgence.
Similarly, even owner-occupants can fall into the trap of tempting and unnecessary renovations. It bears mentioning, however, that renovations by residents who intend to stay involved a different definition of value, one that is more abstract and often harder to quantify. Without the intention to sell, the objective won’t be to raise the property’s price but to increase the occupants’ quality of living, whether it is by transforming spaces to fit an evolving lifestyle or by indulging a personal preference. Nevertheless, renovations will cost the same, and that often means a sizable capital expenditure.
Should the homeowner decide to sell, it follows that they must first secure another residence. There is sometimes an interim between finding a buyer and having to move into another house or condo unit (there may be a baby on the way or a job about to commence). Meanwhile, the new property demands a down payment. With the average price of a house in Canada at just over $480,000, a 20% down payment (around $96,000) is a hefty sum to raise at short notice. Additionally, with real estate being notoriously time sensitive, the property may be awarded to another buyer—one with cash on hand.
The unavailability of capital is a massive caveat to many Canadians’ attempts at increasing property value. Traditional lending institutions like banks are often hesitant to fund renovations or provide bridge financing pending a home sale. Renovations do not assure additional income, and one cannot predict when a house will sell and for how much exactly. In this regard, private lenders offer much-needed bridge financing.
A bridge mortgage, secured against the asset you already own or are about to buy, may be used to fund a home improvement project or the purchase of a new property, freeing up your cash flow until you receive a payoff. Bridge loans are typically short-term in nature, thus requiring fewer interest payments. This discourages many lenders from offering and approving bridge financing. Fortunately, a private lender who has the wherewithal to assess your situation will be more likely to offer favourable terms on a bridge loan; often, this means working with you, the borrower, to find the right timing for the loan’s maturity date.
Another way to utilize your real estate asset and secure some working capital is by taking out a second mortgage. The risk on these types of loans are higher for lenders, so interest rates will be slightly higher than the primary mortgage, but because second mortgages are secured by home equity, they are still cheaper than other forms of credit.
The additional inflow of capital can be optimized for value creation, and not just in terms of real estate assets. A second mortgage can also be used to repair your credit via debt consolidation, pay for further education that can move up your pay grade, or grow a profitable business. Spend the money on your property, however, and you are basically profiting off nothing but an ingenious strategy—using your asset to increase its own value without hurting your cash flow.
Many people buy real estate because generally, its history is one of price appreciation. The occasional slumps and implosions, however, have resulted in disaster for those who invested without strategy. Something many homebuyers and property owners fail to consider is that value does not have to solely rely on the economic context or market movements, both of which are beyond the control of even the most experienced investors. Like income from employment or profit from a business, value can be generated with the right strategy.
The typical businessman might say, “You have to spend money to make money.” Savvy investors have improved upon that adage, however. With the right leveraging tactics, you can spend somebody else’s money instead.