Savvy investors should look to recycle their equity as quickly as possible. Once the property experiences growth, a valuation should be prepared by your bank in order to determine your overall equity. This process can be repeated as often as annually.

How to use your lazy equity

Below is a simple visual representation of how you can turn your equity into something substantial. The key is to duplicate this process in order to build a larger, more sophisticated property portfolio.

Source: Property Buyer, 2016, http://www.propertybuyer.com.au/

How much do properties grow in value?

This is never an easy question to answer. The below figures detailing Sydney’s median house prices over the past four decades go some of the way to answering this question.

1980 – $68,800
1990 – $194,000
2000 – $287,000
2009 – $547,000
2016 – $1,050,000

There’s a clear pattern in how properties have grown each decade, with the most recent median prices growing exponentially.

With the right advice and financial structure, you can use your lazy equity to continuously grow your portfolio.

What now?

If you’re keen to grow your portfolio, follow these steps:

1. Revalue your property: first things first, make sure you get your property valued. It will give you true transparency on what your financial situation is before you make any decisions.
2. Recycle your equity: do this after making considered, educated decisions. Ensure you seek the help of professionals to assist with your choices. A mortgage broker and financial advisor are a great place to start.
3. Get the equity moving: engage with property professionals to seek out a great investment purchase which is capable of providing you with high capital growth and strong rental yield.

To get your equity to work for you, contact CPS Property today to discuss your investment options.

Most people don’t begin investing with enough to cover the entire cost of a property. And chances are, you don’t have a tidy million sitting idly in your bank account just waiting for the right property to pop up.

So, what are your options then? A little thing called leverage.

What is leverage and how does it work?

Leveraging is an investment strategy, whereby you use borrowed money to finance an investment that you couldn’t afford to buy without those borrowed funds, and hope that it increases in value over time so that your return on investment (ROI) also increases.

Although some investors see it as risky, leveraging property allows you to purchase more property, thus increasing the size of your portfolio, than you would otherwise be able to afford.

When you invest in property, a financial lender will require you to put in, or pay, an amount of money towards the investment, but this amount is usually just a fraction of the overall value of the investment. Then, as the investment increases in value over time, so does your future ROI.

Let’s look at a common property scenario. If an investment property is $400,000 and you need to put down 10% for a deposit ($40,000), then you’re using a relatively small percentage of your own money to finance this purchase, with the majority of funds being borrowed. Assuming this investment has everything going for it and appreciates by 5% per year, your net worth from this one investment would grow to $420,000 in just one year.

If you then compare this to an unleveraged investment, where a $40,000 property is purchased outright (and if you find a $40,000 property, let us know!), and the same 5% rate of appreciation occurs over one year, your net worth would be $42,000.

A difference of $18,000!

Now figure out those figures over multiple years, and it’s easy to see why so many investors choose to leveraging property to build their portfolios and net worth.

The benefits of leveraging property

Using the $40,000 as an example again, if you placed that money into a term deposit at a bank, you could feel safe and secure knowing exactly what your interest rate is and what you will earn from this investment. This is a hassle free investment option with virtually zero risk involved.

However, to really maximise your wealth, you need to be able to take risks. As risky as leveraging may seem, the financial rewards can also be far greater than other investment strategies.

The main benefit of leveraging property is that it frees up your capital because you only have to front a fraction of the property value. This also means that you have the potential to have more than one investment going simultaneously.

You also get to enter into these investments faster than if you had to save for the entire property, meaning you can get into the property market at today’s prices, but benefit from them in years to come.

The risks of leveraging property

Just as leveraging property can increase your wealth, it also has the potential to decrease it. If your investment property drops in value, that extends to your overall net worth. If property prices fall low enough, you can even end up owing more to your loan than what the property is worth! Choosing the right property in the right area is a good way to minimise this risk.

In an ideal world

It’s important that you have a clear plan for your investment strategy. Leveraging property is quite common, especially when you consider that most people require a mortgage to purchase a home. To get the most out of your leveraged investment strategy, ensure that you have a financial buffer in place for unexpected costs, and consider buying in metro areas where property demand is higher.

Ideally, you would buy below market value and only properties with a strong yield so that they are also paying themselves off.

To learn more about how you can make leverage work for you, contact us today.

So, what’s the difference between positive and negative gearing?

Positive gearing

Positive gearing simply means that your investment property earns more income than it costs to have it, so you are receiving more rental income from your tenants than what you pay for things like the loan repayments, interest, maintenance of the property, rates and other fees. Usually this happens when rents are high due to a strong demand, or when interest rates are low.

For example, if your investment property earns $500 per week in rental income and your loan repayments and other associated costs are $450 per week, then you are positively gearing that property and you don’t have to pay anything out of your own pocket each week to continue your investment. The property effectively pays for itself.

That said, it’s not always the investment strategy of choice for many investors. Let’s look at some of the pros and cons of positive gearing:

Pros

• The risk isn’t as high – because the property pays for itself, the risk isn’t as high if your circumstances were to change such as a job loss.
• More money in your pocket – on a week by week basis you have no out of pocket expenses, and you might even be making enough from the property to make extra loan repayments or save for your next investment.
• Future lending – the status of your investment portfolio can look good, which may mean you are appealing to lenders for your next loan. 

Cons

• Changing markets – depending on where you buy, you could experience a dip in demand for the property which would mean less, or no, income from the property.
• Income is taxable – just like any other income, the income you earn on a positively geared property is taxable.

Negative gearing

Negative gearing with property is when your expenses, such as loan repayments and rates, are higher than the rental income you receive from tenants. This means that you are out of pocket as you will have to contribute to the loan repayments yourself as well.

While it sounds like an odd thing to do in the short term, the goal with negatively gearing an investment property is that you will eventually make more money through an increase in its value than what you pay out, or lose, through expenses.

Let’s look at the pros and cons for negative gearing:

Pros

• Tax breaks – a lot of investors choose negative gearing because it allows you to claim tax deductions relating to expenses you incur. Investment losses reduce your taxable income which in turn reduces the amount of tax you pay.
• Appealing to tenants – often properties that are negatively geared have slightly lower rent, which is appealing and more affordable to potential tenants.
• Capital gains – if the property continues to increase in value, the capital gains from it will eventually be high enough to cover borrowing and associated costs, meaning the investor can earn more when selling.

Cons

• Higher risk – if your income suddenly changes, you may not be able to cover your costs for the property.
• Budgeting – you need to be able to budget way ahead of time, for things like maintenance, increases in interest, or if the property sells for a profit you will need to pay tax on the capital gain.
• A long game – negatively investing in property is a longer term strategy to create financial freedom, so you need to be prepared for that and not expect passive income yet.

So, at the end of the day, neither investment strategy is better than the other. The both have their advantages and disadvantages, and the benefit of either will depend on the investor and their ideal strategy.

If you’d like to discuss which option bests suits your needs, contact us today!

What is ‘equity’?

Equity is the difference between your property’s market value and the amount owing on the mortgage. For example if your property is worth $500,000 and you owe $300,000, your equity value is $200,000. The key piece of information to remember here is equity is based on “market value”, which means if you’ve renovated your property since the purchase, or you haven’t had it valued in a couple of years, you could be sitting on a lot more equity than you realise.

How does it work?

When purchasing another property (with a decent amount of equity already under your belt), you can access 80 per cent of your equity as security with the bank, which automatically eliminates or reduces the need for a deposit on your next purchase. This is also known as “useable equity”.

As a general rule of thumb, according to NAB, to calculate how much you can borrow from the bank -multiply your useable equity by four. So in this case $200,000 x 4 = $800,000 borrowing capacity. However, this can vary based on several variables and will depend on your bank and unique financial status.

Can you use your home to buy an investment property?

Yes. How wonderful is that? Many homeowners are in a great position to use the equity from their owner occupied property to begin building their property portfolio. However it is important to remember to pay off your personal home loan as fast as possible as this isn’t tax deductible unlike interest on an investment property which is tax deductible.

What’s next?

Like any major financial purchase, it’s important to do your research and engage with a financial professional to assist you with your long-term strategies. Understand the scope for capital gains and impact on cash flow, and ensure you don’t over capitalise and therefore put unwanted stress on your hip pocket.

Contact CPS Finance today to discuss the property investment options available to you.

So what steps can you take to maximise your property portfolio?

1) Identify your objectives and begin planning

Objectives and goals will vary amongst investors depending on their goals, income, and resources available to them. The one thing that all successful investors have in common, however, is planning. Planning is key to growing a strong and economical portfolio and will help investors move beyond owning a single property, to a multiple property portfolio.

2) Do your research

There is a lot of commentary about the property market bubble and whether or not it will burst. Either way, focus on locations that will make good, long-term investments, rather than what might occur over the next six months. Examine economic and property trends in different markets, read and seek advice, attend seminars – make the most of all resources available to you.

Furthermore, it is important to seek financial advice from professionals who specialise in structuring loans for multiple property investors. With their advice, you can also consider the benefits of an offset account, using your SMSF to purchase property, and how to maximise the equity from your home to invest. Knowing your options will help you make informed decisions to achieve your property goals.

3) Reassess

Once you’ve purchased an investment property, continual monitoring of the economy, interest rates, property trends and changes in legislation will help you to continue to maximise tax benefits and cash flow. Reassessing your financial situation periodically is critical to ensure that your assets are working for you to their full potential.

4) Diversify

As your portfolio continues to grow, the power of diversification will become more prevalent. Diversifying the properties you invest in will minimise the risk and potential effects if the property market should change. Find out more about diversifying your property portfolio.

Growing your property portfolio doesn’t need to be a arduous task. Invest in a knowledgeable team of experts to help you achieve your goals.

Contact CPS Property to discuss expanding your property portfolio today.

The amount of equity you have in your property is the difference between its market value and the amount of any mortgage finance secured against the property.

Read the full article on yourmortgage.com.au

Interested in investing using your equity? Contact us.

Check out the latest findings from the Roy Morgan Research Consumer Single Source survey of approximately 45,000 people per annum thanks to Announcer.

Investors

The survey reported that the 35 to 64 age group accounted for 78% of the increase in the growth of investment property loans over the last four years.

Home owners

The study also showed that while the proportion of over 50s with an owner-occupied home loan increased, the proportion of under 35s with owner-occupied home loans decreased. For the 2011/2012 tax year it was reported that 19.3% of Australian tax payers owned an investment property. That’s nearly one in five compared to just 12.9% about 20 years earlier (1993/1994).

And very few invest more than once

According to the ATO data (2011), 72.8% of individuals who owned an investment property owned just one. Meanwhile, 18.9% of those individuals owned two properties and just 0.9% of the same owned six or more.

The gap is closing

Due to the historically low interest rate environment, many people are using the equity in their current property to purchase an investment property. With rates so low, the gap between investment loan repayments and the rent received has reduced compared to a few years ago. Sometimes the gap is very minimal – particularly after a refinance.

Attitudes are changing

We are starting to see a very different attitude from people purchasing property. A few years ago, property purchase was all about owning your own home. Most clients also thought that investing in property would be at the expense of owning their family home. These days, with low interest rates and first home owners being priced out of buying their family home, we are seeing more people take on investment properties as a solution to getting a ‘foot in the door’.

Confidence is increasing

Our older home owners have seen the benefit of some good capital growth over the last few years. They are now feeling more confident to use some of this recent equity, coupled with low interest rates, as an opportunity to start investing in their financial future.

As we look at the prospect of pension cuts and increasing the work life expectancy to the age of 70, this seems to be a step in the right direction for many of our clients.

Craig James (Chief economist at CommSec) has pointed out that Australians are holding their savings in the following places: 27% in the bank 24% in real estate 17% paying down debt 10% in the share market.

He stated that consumer confidence has been low since the GFC and that “time cures all ills”. He would like to see consumers take on more investments.

Most people struggle with the concept of purchasing an investment property while still trying to pay off their home mortgage. Guess what – you’re not alone! Only 19.3% of Australians appear to be comfortable with this.

Interested in using the equity in your home? Contact CPS Property today.

There are a number of factors to consider when working out how long it takes property prices to double, and the seven to 10 year rule isn’t accurate.

The big factors are those such as supply and demand, interest rates, employment, affordability and consumer confidence. Other factors such as population growth and council commitments to development can also have a strong impact on how long it take property prices to double.

The type of property and its surrounding amenities and infrastructure can affect the supply and demand factor for a particular property market.

The risk of believing these property investing myths and making decisions based on them is that they can affect your chances and ability to build and expand your property portfolio.

The good news is that property in Australia is growing in value exponentially, and for many investors they may be lucky enough to double the value of their investment in 7-10 years. However, this isn’t a sure thing. The important thing is to do your research and get advice to find the right place to invest with good capital growth potential. Contact us to find the right property investment for you.

Have idle equity? Here’s what to do.

With sound financial planning and astute market sense, the equity in your existing property can still be leveraged to build your portfolio and create wealth. The question is how to do it.

So far, so good, but what’s next?

Should you sell and reinvest, or borrow against the equity in an existing property? The fear of losing the family home or endangering an existing investment property is not crazy, but it may prompt an overly cautious approach that compromises the value of what you have already built.

Remember this. You may be able to refinance an existing mortgage, freeing up as much as 80 per cent of your equity. This sum can then be used for the deposit and costs of other investment properties. Although you end up with two mortgages, the net result may be greater equity in the properties as a whole. The numbers matter, and every situation is different, so you should seek the advice of an independent property investment specialist and a mortgage broker to ensure that you are making the smartest decision.

What you can do to prepare yourself

There are five important steps you should take before making a decision on your property investment:

1. Educate yourself through books, podcasts and seminars. Make sure to get a variety of perspectives.
2. Talk to people who have experience with leveraging equity. Nothing replaces news from the trenches.
3. Seek the advice of a trusted property advisor. They will be to advise on how much equity you’re likely to have in your property and recommend a course of action which gets you the best return on your investment.
4. Talk to a mortgage broker about how much you can borrow and how you can get the best deal on your loan.
5. Make sure that you have a plan to get out of an investment if it does not work out. Although there is no need for unreasonable risk, all investments are inherently speculative. It may be best to structure each transaction separately so that one puts the other in as little risk as possible.

Using your existing assets to build wealth makes sense. As you consider your options for leveraging your equity in the hottest real estate market many investors can remember, make sure you get the advice you need from sources that you trust.

When looking for suburbs with capital growth potential, it is critical to ensure that that growth will be sustainable. Some suburbs present short-term capital growth opportunities which don’t always last the test of time. It is critical to identify this from the outset to avoid any traps.

In most cases suburbs with unsustainable capital growth are artificially inflated due to industry, an influx of temporary residents or tourism. In other cases, certain events can reduce the value of a suburb such as the impacts of weather or climate.

Mining towns are a good example of suburbs which are artificially inflated as a result of industry. Prices in these suburbs shoot up as a result of an influx workers with high disposable incomes. However, with the mining boom now over, many of these towns are shrinking or disappearing. Those left with property investments in these towns are often stung by falling values.

Fishing towns like Port Lincoln have also experienced rising prices as a result of the fishing industry and tourism. However, restrictions on commercial fishing, as well as depleted fish populations are likely to impact both industry and tourism, affecting the economy and subsequently impacting property values.

Canberra experiences high property values as a result of the population having high disposable incomes. Largely populated by politicians, departmental staff and journalists, the population is transient and many will only live in Canberra for short periods before moving on. This means property values are really only sustained over time as a result of a constant stream of new workers. Should cuts to government departments take place, which is a very real possibility under the current government, the population will reduce, meaning there will be more stock and less demand. This will inevitably contribute to falling prices.

Severe weather events like drought can also affect property values. For example, several years ago prices in Goulburn and the Southern Highlands fell as result of drought. Climate change is also likely to impact the value of property prices in certain suburbs, for example waterfront properties over time are more likely to experience rising water levels and erosion.

When looking for Investment Grade Property (IGP’s), it is critical to examine the capital growth drivers closely. What is driving the growth in the area and is the growth sustainable? Chat to your trusted property advisor for expert advice or call 1300 937 277 and take the fast track to creating wealth through property.