What is equity and how does it work? Equity is the capital the banks will allow you to borrow against your property. Over the past few years while the market has been building, a lot of property owners who had purchased earlier have had their property worth increase. There are also owners who have been living in the same house, or owned property for such a long time and own it outright.
If this is you, then it may just be worth having a chat with some financial institutes to find out your current loan capacity. Here’s a breakdown on how it generally works…
If your property is now worth $700,000 and you currently have a mortgage of $300,000
The banks will allow you to borrow up to 80% of the market value of your property which would be the sum of $546,000 minus your current loan of $300,000.
This will leave you a total of $246,000 to borrow against your property.
Now here’s the future side of things. As many would look at this figure and maybe take the money to upgrade their current home or even go away on a long awaited holiday, what we would normally suggest you do is put it back into property and start to build an investment portfolio that will provide a passive income into retirement.
There are two ways you can build your portfolio and depending on what your primary purpose is, will depend on what type of property you will purchase.
The first is to build a portfolio that will build in capital wealth. This means you would lean towards properties in affluent suburbs that have a strong reputation for capital growth or even estates where strong infrastructure is being built around. When the markets rise, like the past 7-8 years, these areas see expediential market growth and in turn either increase your loan capacity or give you the ability to sell and cash up on your gains… Though watch out for those capital gains taxes. The only thing I’ve personally noticed with these properties is that depending on your financial situation, the rental income achieved from these properties average around 2% return per annum which means there will most likely be a shortfall in loan repayments and you will have to dip into your own pocket to pay for the remainder. The downside is if things tighten up in the economy and the market corrects itself, you may be lead to you selling your property premature to its gains and sometimes, even at a loss.
Another way you could build a portfolio, would be looking at properties that may not bring strong capital growth over time, though consistently bring a much higher rental return. Smaller studio apartments and serviced apartments, as of late, have become very appealing to many people looking to build a passive income for retirement. These properties are inexpensive, you can find properties for as low as $150,000 in Melbourne CBD, and generally have strong returns with an average of 7%-8% return per annum. If you look hard enough and negotiate well, you may even get up to 11%+ return. Now imagine having $1,000,000 worth of these assets at a base return of 8% which will increase as the years go on. This is $80,000 per annum minus expenses and of course taxes. That’s money in the bank while you travel, go for coffees with friends or play a couple of rounds of golf.
Set and forget, live life and secure the future not just for yourself but for your kids and their kids. If you’re sitting on a little bit of equity and never thought about creating another source of income for yourself then feel free to connect with us anytime to discuss your options… though we always advise you to seek professional advice from a financial planner to better understand the best way to structure your new portfolio.