The Power Of Equity: How To Build Wealth And Grow Your Portfolio
Due to its highly leveraged nature, property offers investors multiple opportunities to benefit from the power of equity by using strategies including value-adding, refinancing and debt consolidation. More commonly used by experienced investors, these tactics illustrate real estate’s unique proposition as a flexible asset class with which to build wealth. Best implemented in conjunction with your mortgage broker and accountant, these strategies require a personalised game plan to ensure they’re in line with your investment goals.
Creative ways to add value
Actively investing through renovation and development is without doubt, a fast track method to creating value for investors. Options include undertaking cosmetic renovations or adding granny flats on to your block of land - both of which serve to increase rental yield and cash flow. The increased equity can then fund another investment property or be used to purchase high-yielding shares on the ASX in a diversified passive approach. This could potentially provide additional capital gain or a strong yield which would further increase your serviceability.
Home extension: equity boost
A more sophisticated strategy can see further equity provided through improvements to your principal place of residence. Let’s take the example of an owner-occupier living in a small 2 bedroom terrace in Annandale, Sydney. The property was purchased several years ago for $1m, with an existing loan size of $680k. The owners were able to refinance with an 80% loan-to-value-ratio on a valuation of $1.2m, which enabled them to unlock equity of $280k. A straightforward extension was undertaken to create an additional bedroom and bathroom - which not only provided a much-improved dwelling but increased the estimated market value to $1.6m. Additional owners’ equity of more than $100k was created, which can be unlocked down the track for future investment.
Debt consolidation to reduce expenses
Under-utilised equity can assist investors and homeowners, by reducing multiple lines of credit for cars and other assets, which sit at extremely high-interest rates compared with home loans. If there is sufficient equity in a property, this could allow for a refinance to consolidate these debts - improving cash flow and decreasing overall repayments once lower interest rates come into effect. Also of note, during relationship breakdowns often the forced sale of property becomes an issue, which can often be problematic due to incurring sale costs and capital gains tax. If there’s equity in the property - and one partner can service the debt on their own - it may be possible to hold on to it and pay out the other partner.
Refinancing under new lending environment
If you’ve got equity that you would like to access, refinancing often means moving to a product at a better rate and generating further savings. Tighter lending restrictions under the Australian Prudential Regulatory Authority, however, means investors might not be able to cash out (have access to their equity) without a full refinance. Individual lenders have different rules around this - some are extremely restrictive and won’t provide cash out, while others require sufficient evidence (i.e. a contract for sale or quotes for renovation). There are also lenders that have an open cash out policy, where they merely want to know the purpose of the cash out without evidence.
No matter what strategy you consider - or which individual lender’s credit policy - when it comes to successful property investment it’s crucial to get professional advice. A good accountant, financial advisor and mortgage broker will help make the most of your situation and understand potential implications of any decision. You’ll then be able to best leverage your equity to achieve your wealth creation goals.
* Please note this post does not constitute financial advice and does not take into consideration your specific situation. Please seek specific advice before acting.