Equity is definitely one of the most misunderstood elements of property investing. This can be attributed to 2 major misunderstandings;
- What debt actually is,
- The incorrect perception that equity holds tangible value, and is worth hanging onto.
Unfortunately, the investment world is rife with cautionary tales from those who invested poorly and found themselves with too much debt, not enough cash flow and investments that served little purpose. However, in reality, intelligent investing and strategic action would eliminate these types of failures, and put any investor in a position where they are actually growing real, tangible wealth.
Before we begin to discuss equity as a formulaic approach to investing, let’s explore two of the major misconceptions people commonly hold onto when it comes to equity.
- Equity Is worth something.
“I have $150,000 worth of equity in my property”
This phrase has become all too common as property values in Australia have skyrocketed in recent years. Homeowners have seen the increase in equity as something to be celebrated, but this is the equivalent of having $150,000 in a zero interest bank account, that you can NEVER draw from. Furthermore, that value only exists as long as the market dictates; there is no control, no safety and no strategy in maintaining this. Equity, at least in its traditional form, is worth nothing.
- Using equity is spending money and building debt.
An overused phrase from the early 2000’s said that when you borrow against your equity you are, “leveraging.” The term referred to how the act of using your equity is more of a transition than a transaction. It involves taking something that is worth nothing and turning it into something that is tangible. Using your existing equity for property investment involves taking a latent resource, and transforming it into an actual asset; i.e more property.
But how does this work at a practical level?
Let’s say you come to us as a client. Your goal is to build a property portfolio, but you don’t want to spend all of your time and/or money in order to this. You own your home, which you purchased five years ago and, thanks to an informative chat with one of our consultants, you now understand that the equity in your home is an opportunity for you to start your investment journey. In saying that, you don’t want to leverage all your equity at this stage.
This situation is actually pretty common and DDP Property would;
- Only target properties worth approx $250,000 to $350,000.
- Only target properties that would be positively geared (i.e. the incoming revenue covers the outgoing expenses).
- We would only use a small amount of your current equity to do this, say a $35,000 deposit, which would be ‘leveraged’ by your current your equity.
But what would that cost you?
$35,000 multiplied by 4.75% (the current interest rate) divided by 52 weeks, equals $32 per week.
You would own an investment property for the same amount of money you spend on coffee each week.
Equity is generally misunderstood because when you break it down, the pathway to wealth seems too easy. It is our goal to make sure that your investment portfolio grows consistently, and without considerable effort on your part.
Although this article is designed to demonstrate a formulaic approach to leveraging equity, all circumstances are unique, it is important that you seek the advice of a professional before making any assumptions with regards to your investment strategy. If you’re wondering how we might help you achieve your wealth through property dreams than wonder no more. Click here to request a obligation free call…