Building a property portfolio with unlocked equity
There’s a well-known saying amongst those who have built themselves up from humble beginnings into successful, wealthy people – the first million dollars is the hardest to make. While it’s a easy for someone who has multiple millions of dollars behind them to make such an motivational claim, there may actually be some truth behind it.
After all, to use another well-worn adage, you have to spend money to make money. By that rationale, it’s not easy to increase your wealth without having adequate resources to build from.
This concept of using what you already have to allow you to get more is a fundamental principle of property investment. While scraping together enough to buy your first home can be difficult, and indeed for many people it will be the biggest real estate challenge they face, once you have managed to purchase that first home the road should get easier.
So, how is it that adding additional properties to your portfolio becomes less difficult once you’ve bought your first? The answer is equity, and as many property agents will tell you, knowing how to use it effectively is the secret to successful real estate investment.
Knowing how to use equity effectively is the secret to successful real estate investment.
What is equity?
Before we get too deep into how you can use equity to your advantage, let’s take a moment to understand the basics. In simple terms, if you currently have a mortgage but decide to sell your home, the amount of money left over after paying the outstanding balance of your home loan is considered your equity. It’s essentially a monetary figure that represents how much of your home you actually own.
For example, let’s assume you own a house worth $500,000, and while you have been paying off your mortgage, you still currently owe $350,000 to your lender. The difference between those two figures, $150,000, is your equity.
Getting a 100 per cent accurate figure is difficult, as your home’s value isn’t truly known until you actually agree on a sale price. However, a property expert such as a buyer’s agent will be able to make a reasonable estimate based on several factors, including your property’s council valuation and comparable recent sales data.
Growing your equity
While the most straightforward way to grow equity is to simply keep paying off your mortgage, you might be surprised to find that there are several ways to improve your position. Equity is impacted just as much by the overall value of your home as it is by the outstanding balance of your home loan.
This means that, while reducing what you owe will result in a gradual rate of growth, you are able to make larger equity leaps by making improvements to your house. Carrying out renovations, for example, can not only make your home a more enjoyable place to live, it can actually affect your ability to purchase additional properties as you’ll see below.
There are potentially some external factors outside of your control that can alter your property’s value, but renovations are a great way to be proactive with value growth. It’s a proven strategy too, with the Westpac Renovation Report in 2014 finding that almost 90 per cent of Australians agreeing that it increases the value of homes.
A property buyer’s agent can be invaluable, to point you in the direction of areas with high growth.
Now that we’ve established what equity is and how to grow it, you will probably be starting to understand that building it up is not something that happens overnight. For some people, simply continuing to pay down their home loan is satisfaction enough, but for anyone interested in making serious money from property investment, it is possible to speed up the process.
Manufacturing equity is a strategy for people who know the best areas to purchase real estate, and have a keen sense of how the market cycle is moving. Here’s where the expertise of a property buyer’s agent can be invaluable, to point you in the direction of areas with high growth forecasts where you might find some great deals.
The process of manufacturing equity is related to the renovations discussed above, it just means being a little more aggressive. Rather than making improvements to your own home, be on the lookout for properties in disrepair, those fabled “fixer-uppers”, where you can swoop in and make easy value-growing additions.
Another option involves purchasing a property that sits on a large amount of land, and subdividing the section to build an additional structure on the excess space. In a more extreme example, equity can be manufactured by snapping up a low-quality property on a high-quality site, knocking it down and building something new from scratch. All of these techniques have the same intended result – to quickly increase the value of the property and unlock greater equity.
Using your equity for further investment
Once you have sufficiently increased the value of your property (or properties), you can start to get serious about using your equity to secure further lending finance. This doesn’t necessarily mean you will be taking out a whole new home loan, but rather you will be able to refinance your current mortgage to gain access to more funds.
When you approach your lender for refinancing, your equity in a sense becomes the collateral on the loan. Several factors will be taken into account when the bank is calculating how much money they are willing to risk, but as long as your current property is decent then most lenders will allow you to borrow a reasonable percentage of your equity.
A popular option offered by many lenders is a home equity loan structured as a line of credit. This means you’ll be approved for a loan of a certain amount, say 70 per cent of your equity, but will only be charged interest on how much of that you actually spend. You might think of it like a credit card with a particularly high limit, with your property offered as security. It’s a good feeling to have that amount readily available should an opportunity present itself, but if you decide to sit on it you will not be penalised.
As your current property is decent, most lenders will allow you to borrow a reasonable percentage of your equity.
Finding investment opportunities with a buyer’s agent
Whether you’re looking for your first investment property to become the foundation of your portfolio, or are keeping your eyes out for the next great opportunity, the benefits of seeking advice from an expert buyer’s agent cannot be underestimated.
At Cohen Handler, we can help you formulate the perfect investment strategy. That might mean scouring the real estate markets in Sydney, Melbourne and Brisbane for low-cost properties in which to manufacture equity, or using our extensive network to source high-end, luxury apartments.
With over five years’ experience, Cohen Handler’s buyer’s agents have inspected over 30,000 properties for more than 1,500 satisfied clients. Fostering relationships with professionals throughout the real estate industry has allowed us to secure off-market properties for our clients well below market value, so if you’re looking for a great deal to start your investment career, come and speak with us today.
At every stage of the process, from initial discussions about equity right up to investment property purchase and management, Cohen Handler have the expertise to assist you in achieving your property goals.