Four Magic Questions : Part 4

Real Estate Riches: How to Become Rich Using Your Banker's Money
by Dolf de Roos, Ph.D.

(Page 4 of 5)

When you buy your $1.5 million property for a contract price of $1 million using your $100,000 cash and a mortgage of $900,000, what can you personally do to increase the value of your property?

Wow! Where do we start?

You could paint the property. If you do not believe that it is possible to buy a property for $60,000, have it painted, and then sell it for $80,000, then you are missing out on spectacular opportunities.

Wait a minute, you say, let's slow up a bit! Why would anyone be willing to pay $80,000 for a painted house, but not $60,000 for one in dire need of a $400 paint job?

The answer lies in the way we have been conditioned to expect instant results. We want, expect, and can generally get instant soup, instant coffee, instant passport photos, instant credit card application approvals, instant messaging, Jiffy Lubes, and Curry in a Hurry.

So when the masses go looking at properties, and they see an old house with bare wood exposed on the siding, they tend to dismiss it as being a rotten old property that will require a lot of work and effort (it probably has many things wrong with it besides the condition of the paint) - definitely no instant gratification! Most people would rather rot in front of the television set than pick up a paintbrush and paint a $20,000 profit for themselves in a couple of days (or better yet, pay someone to paint it for them for a modest $10, $20, or, who cares, even $50 an hour while they spend the time saved looking for the next $20,000 profit).

Magically, when that same house is painted, the masses will see it as a cute cottage in excellent condition that they could move into instantly, that would be a delight to live in, and that they could (instantly!) show off to their friends. Perception is reality!

Well, so much for our first idea on how you could increase the value of your investment in property. There are many other ideas... You may increase the value of your property by replacing the rusted gutters and downspouts on the front, by putting in a new heating/cooling system, by changing the curtains or drapes, by modernizing the bathroom, by putting in a new kitchen, by painting the roof, by erecting or replacing a fence, by installing an alarm system, by fitting new doorknobs throughout, by changing the window shades, by adding a swimming pool, by removing an old shed, by cleaning the carpets, or by paving the driveway.

On commercial properties you can increase the value by finding a tenant for a vacant space, by splitting a large area that may be worth only $5 per square foot and for which you have no tenants into two smaller areas worth $7 per square foot and for which you can easily get tenants, by (again) painting it, by agreeing to a longer lease length, by attracting a better tenant, or by replacing the carpets.

There are literally 101 things you can do to massively increase the value of your property without spending much money. In fact, to prove it, I have written a book detailing just that (see Appendix). We will explore some of these ideas in more detail later in this book.

But for now, let's get back to the point. Whereas with most other investments there is little you can do to increase the value of the investment, with property you are only limited by your imagination.

This brings us to our fourth and final question for this section... Part of the reason why we invest is in the anticipation that things will go up in value. So, let's assume that all invested assets have doubled in value. (I am not specifying a time frame here-it may happen in a year or over a period of many years.) That means that the $100,000 stock portfolio has doubled to $200,000, and that the $1.5 million property has doubled to $3 million.

Question Four

You bought $100,000 worth of stock with $100,000 cash that was worth $100,000 the moment you bought it. It has doubled in value to $200,000. What must you do to enjoy some of the increased value?

Well, for most investors, the simple answer is: "Sell!" You could sell the entire portfolio, and thereby get your original $100,000 investment back plus $100,000 profit, or you could sell a portion of it. Either way, depending on the tax jurisdiction you are in, you will be up for capital gains tax, which will take some of the wind out of your windfall. What's more, by selling part of the portfolio, you are reducing the amount that is left that can earn further profits for you. Something sounds counter productive!

You bought $1.5 million worth of property for a contract price of $1 million using $100,000 cash and a mortgage of $900,000. It has doubled in value to $3 million. What must you do to enjoy some of the profit?

By now you have probably learned to expect something other than the pat answer: "Sell it!" And you'd be right. Selling the property would be the dumbest thing you could do! Why sell it? After all, you own an asset, the value of which is indexed for inflation. It is generating a passive rental income that is similarly indexed for inflation. As time goes on, both the value of the property and the income it generates will continue to creep up. What's more, if you were silly enough to sell, you may have to pay capital gains tax on the profit.

Copyright © 2001 by Dolf de Roos, Ph.D.

About the Author

Dr. Dolf de Roos began investing in real estate as an undergraduate student. Despite going on to earn a Ph.D. in electrical and electronic engineering from the University of Canterbury. Dolf increasingly focused on his flair for investing, which has enabled him to have never had a job. He has, however, invested in many classes of real estate (residential, commercial, industrial, hospitality, and specialist) all over the world.