Make Your Equity Work For You
Equity is as good if not better than real money when it comes to purchasing property.
Instead of daydreaming about winning millions through lotto with the odds squarely stacked against you, more Australians could be putting the equity that’s lying dormant in their own home to good use. It’s definitely a neglected goldmine and one that can be easily used to help fund an earlier retirement and financial independence.
It makes sense that to make money when it comes to property you need to borrow, buy and renovate, and either wait for increased capital growth while you rent it out, or sell it and go again.
Equity is the difference between the mortgage that you owe and what the property is actually worth. It’s how investors are able to keep growing their property portfolios without saving up for years to put down a deposit. By using a tactic called leverage they use the equity generated by the increasing value of an existing property to purchase a new one. This property then grows in value, allowing the investor to repeat the process and buy again.
Typically, banks will lend up to 80% of the value of a property and as a general rule, you can afford an investment property that’s four times the value of your useable equity.
- Value of your property $400,000
- Value of your property @ 80% $320,000
- Minus your mortgage $220,000
- Useable equity $100,000
- Value of your investment property up to $400,000.
However, you also need some funds in reserve for such things as stamp duty, legal fees and so on, and a buffer for any repairs, rates, utilities plus enough to cover the mortgage during those times that you may be between tenants.
Options for first home-buyers
There is no denying that it is becoming more and more difficult to buy a house, especially for first home buyers. As a result, we have seen a huge amount of solutions to the problem including parents using their equity to help finance their children’s first foray into the market.
Others are dipping into their savings, cutting back on their own spending and delaying their retirement.
The ‘bank of mum and dad’ is now the nation’s fifth-largest lender behind the big banks. Parents are increasingly letting their children live with them while they are saving for a deposit or even directly contributing to the deposit. It’s estimated that around 41 percent of parents assist their children in this way.
Research has found that the average amount of deposit assistance is highest in NSW at over $53,000 compared to around $44,500 in Victoria and $45,700 in Queensland.
In addition, parents are assisting with repayments, going into property purchases as a partner or even buying it on behalf of their children.
If you are a parent in this situation buying an investment property with your children is one of the best ways to teach them financial life-long lessons, as well as helping them with their credit rating. They can then take on the responsibility of renovating it and pay the bills on it so you do not have to outlay any more money, apart from the equity.
After generating further equity, the choice is yours to either sell the property and equally divide the property, or buy something else.
Here are some other ways you can make your equity work for you:
- Build a granny flat – Buying a house with a granny flat or building one on a property you already own is a great way to generate equity, make extra income and as a more affordable way to start an investment portfolio rather than buying a standalone property. If you want to really get ahead live in the granny flat yourself for a few years and rent out the main property.
- Rentvesting – buy an investment property while continuing to rent to enter the property market.
- Renovate for return – whether it is extending your home or landscaping, any renovation will add value to your home and in turn increase your equity.
Cohen Handler’s team of expert buyers agents are specialists in finding the right property for you at the right price. If you would like to find out more about using your equity to buy an investment property, contact us now.