1. How to make lazy equity work for you
If you have owned a property for longer than 3 years there is a very strong possibility you are sitting pretty with some equity growth. Equity is a very powerful ingredient to help create wealth and put you in a position to retire financially secure. Equity is a simple concept - it's the difference between what you own and what you owe.
Let's take an example. Say you have $100k sitting in an offset account or as equity in your home, then (depending on your income) you could qualify to purchase a property around $500,000. Taking a very conservative 5% pa growth assumption this produces $25,000 p.a. additional equity (or around $480 per week). Now looking ahead say 10 years in the future, the opportunity cost is $314,000 in lost equity and then in 15 years, by which time the property could have doubled in value, the opportunity cost is a massive $539,000. And this is just for one property....imagine what equity you could create if you set a goal and acquired multiple properties.
If you had been a smart investor and chosen a suburb that has a higher growth rate, then you could achieve much higher levels of equity and fast track your progression up the property ladder. Savvy investors look to recycle their equity as quickly as possible. Once you have some growth, talk to your broker and get a bank valuation arranged. This way you get your money working for you rather than you working for money. It's about time the tables were turned and I recommend you review the performance of your portfolio at least yearly.
Talking of smart - Albert Einstein has said "Compounding is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it". The earlier in life you understand and embrace the principle of compounding, the better off you will be.
Below is a simple graphical presentation of what I mean by recycling your equity. It's a bit like the rinse and repeat cycle on your washing machine. By duplicating this process you are well on your way to building a larger portfolio.
Below is the progression of Sydney's median house price over the last 4 decades to give you some motivation to get on the property ladder:
1980 - $68,800
1990 - $194,000
2000 - $287,000
2009 - $547,000
2016 - $1,050,000
Some of you might have heard that you should never use your home equity or wait till the mortgage is paid off. I disagree wholeheartedly. While you should be paying off your non-deductible debt (on your home) you should ALSO be investing in property with the equity you have. It is very difficult to "Save" your way to wealth. How long does it take to save $100k vs creating $100k in property equity? With the right advice and structure you can do both.
If you have any fears about using home equity for investing I recommend you speak to a mortgage broker that can arrange the right finance structure for your individual situation. Using "lazy equity" means you don't have to save up for the next deposit - you have already have it!
Now don't rush out and buy the first property you see or get sucked in by a property spruiker - get a team of professional advisors around you including a buyers' advocate and a finance broker to help
you navigate the best path to financial freedom. It's not rocket science - it is just a matter of making a priority in your life.
Rich Harvey is founder and Managing Director of propertybuyer.com.au, Australia's most awarded Buyers' Advocates. Propertybuyer helps property investors and home buyers search and negotiate the right property at the right price, every time. Visit propertybuyer.com.au or call 1300 655 615.