Supercharging Equity

?? When you read property investing books, often they mention about accessing equity. Basically, you use the value gain of your property to then borrow again for the next property and the next and the next. While in theory it sounds great, in reality it might not be that simple.

Let’s take a $500,000 property value as an example. You put in 20% deposit therefore the loan is sitting at $400k. That $500,000 property goes up by 5% in 6 months (which, in reality, unless market is really-really hot, will not be the case), making its value to be $525,000. Here comes the equity.

The equity is basically the value of the house minus the remaining debt. You would hope to be able to access this “money” as a line-of-credit or similar which you can then use to buy your next property. The problem is though, bank will only lend you 80% of the value of the house. In this instance, the amount of money you can access is (80% * $525,000) minus $400,000 = $20,000.

Now, ask yourself this question. Can you really by a property with $20k? And, this is also assuming the price of the house goes up by 5% in 6 months. Furthermore, equity is not really your money, but rather, the bank’s. Meaning, you will still be assessed for serviceability which, at this current financial climate, banks have been very-very tight with lending and their financial assessment.

I have known some property buyers who should have a lot of equity, only to find out that they cannot access any single cent due to their work situation. In this instance, the reality is not as bright as what a lot of these investment property books have been talking about. In the past, maybe. But since APRA put in stricter measure on banks, accessing equity has been a lot more difficult.

What is the solution? If we are just waiting for natural capital growth, it will take a long time before we can gain some meaningful equity, especially if you are just paying Interest-Only loans. Few things that I have been considering so I can supercharge my equity:

1. Increase income, save more and pay down the debt. There is no way around it. If you want to have more equity, the only way is to start paying down the mortgage. Maybe considering a second job if possible? Whatever you can do to increase earning.

2. Craft that equity. You can do this by value-add your property. Let’s take one of the properties I’ve bought for my client as an example.

Purchase: $415,000
Loan 80%: $332,000
Value after renovation: $670,000
Equity: $204,000. With this amount you can certainly buy more property 🙂

The case study of this renovation property can be seen on https://easybuyer.com.au/…/renovators-delight-renovation-an…

3. Generating more income from positive-gearing properties to pay down the debt. I’ve talked many times about positive gearing properties, and you can certainly use this strategy to earn more income. Let’s use few of the real case studies:

Purchase: $148,000
Loan 80%: $118,400
Interest rate 4%: $4,736/year
Rent income: $240/week = $12,480/year
Council rates, water: $3,000/year
PM 10%: $1248/year
Maintenance: $1000/year
Positive gearing: +ve$2,496/year

Imagine if you own multiple of these positive-gearing properties, the income you receive can be used to pay down the debt of your other properties. This particular case study can be seen on https://easybuyer.com.au/portfolio/buy-hold-8-yield.

Conclusion
4. Combine 1, 2, 3 altogether and boom….you would have supercharged your equity. Find a property that has potential value-add as well as positive gearing. That way, you have plenty of options to supercharge them equities!

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