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Buying Under Market Value

The Importance of Buying Under Market Value

Many readers dream of building a property portfolio. Equally our readers are at different stages of their journey, some just starting out and others who are almost at the finishing line.

Australian property investors have enjoyed a dream run for the last 10 years and, in many cases, have achieved good results during this time. The large scale mass movement in the property market along with ready availability of credit in the early/mid 2000’s wall-papered over some cracks in the strategies employed by some investors.

A relatively simple strategy which is commonly employed by property investors is the basic ‘buy and hold’ strategy.  Put simply an investor purchases their property and waits for it to increase in value, repeating the process as their finance and security position permits.

If we use some simple modelling we can see that the long results for such a strategy can be profitable.

For the purposes of this modelling exercise we will use a property valued at $520,000 with an annualised growth rate of 7%. At this rate a property will double every 10 years.

In the first example our investor has borrowed 105% of the property value to purchase the property and pay purchasing costs. Their total borrowings consist of $546,000 and consist of line of credit funds of $130,000 (deposit and costs) and a further 80% loan of $416,000.

Assuming this investor sold this property after 10 years they could realise a, before tax, profit of $530,000. If the same investor was looking to build a portfolio they would have sufficient equity in this property to leverage into a second investment property sometime in year 4.

Many investors would be reasonably happy with this result.

Let us stir things up a bit and look at this strategy again. This time we will improve the basic ‘buy and hold’ strategy by ‘buying’ the same property. But this time our investor will be buying under market value through Eos’ Armchair Developer program.

This time our total investment is only $410,000, compared to $546,000 in the previous example. The $410,000 includes the initial buy in of $142,000 and the investors’ share of the construction loan.

Assuming this investor sold this property after 10 years they could realise a, before tax, profit of $664,000 – over $130,000 more than a standard ‘buy and hold’ strategy.

If this same investor was looking to build a portfolio they would have sufficient equity to leverage off this property at the beginning of year 2 – approximately twice as quickly as your standard ‘buy and hold’ investor.

If we keep compounding on from year 2 the difference in the overall position becomes even more pronounced.  Clearly the Armchair Developer Program is a far more effective property investment strategy when applied to a ‘buy and hold’ approach.

But wait! There is more................

Not only does the Armchair Developer Program deliver greater capital profits to investors it also significantly reduces costs and makes a huge improvement to an investor’s weekly cashflow. These savings are brought about because of the significantly lower level of borrowings required.

In this example we have been using the weekly interest savings are $183/week.  What could you do with an extra $183/week?

Standard Real Estate Purchase Armchair Developer Program
Total Investment Loan $546,000 $410,000
Annual Interest Bill @7% $38,220 $28,700
Difference $9,520

 

Interestingly when banks assess someone to determine their borrowing capacity they will look at your security level which put simply is the difference between the value of your assets and any loans you have. On top of this they will also consider your ability to service your loan. In other words they will measure your income level and include any rental income you earn.

Unlike standard real estate purchases the Armchair Developer program assists, rather than hinders, additional borrowings.

Clearly buying property under market value using strategies such as the Armchair Developer Program is much better than a standard real estate purchase.