5 things you need to know about equity – Michael Sloan

Equity. It’s a term often used by many, but some people are confused by what it really means. Regarding property, equity is the difference between the value of your property and how much you owe against it.

But there is more to it than that. How much useable equity do you have, and what does it mean when it comes to property investing? Let’s take a look.

If your property is worth $500,000 and you owe $200,000 then you have $300,000 of equity. But it is not all available to you, banks usually lend you 80% of the properties value. This leaves them a 20% safety net.

In this example how much useable equity do you have?  

$500,000 value

X 80% = $400,000

–    $200,000 current loan

–    = $200,000 available equity

You can apply to the bank to have this turned into available funds for you to use.  

But here’s the kicker – make sure you use it to create wealth or you could quickly find yourself in a never-ending circle of debt. Here are five things you need to know about equity so that doesn’t happen to you.

It can make you wealthy.… if you use it carefully

When you have lots of equity you might get excited. All sorts of big dreams may sail through your mind – a new car, that boat you’ve always wanted or even a luxurious overseas trip. But stop. Borrowing money for these things will never get you out of debt. There is a better way…

Equity is the basis for building wealth

Use your equity to add value to your home, or to invest, but invest safely. Buying an investment property is one option, but it is not a guaranteed way to make money. Many investors buy very poor properties that do the opposite of what they hoped. They lose money instead of making it. So make sure you know what you are doing, and if you don’t, then reach out because we can help you. Invest in property wisely and you can build a financially secure future. Adding one investment property will mean your equity will grow faster and your second one may not be far away.

Understand the risks

Of course there is risk in using equity to invest in property. But you can mitigate that risk by buying the right type of property in the right location with the right cash flow. Working with the right guide is a vital first step. Also consider spreading your risk by putting some aside as a ‘safety net’ for any tough times that may come along.

Let’s use the example from above. You have $200,000 of useable equity. Put $50,000 aside for ‘rainy day’ funds such as illness or job redundancy. A separate bank account is best so you are not tempted to spend it if. In this scenario, you still have $150,000 left as a deposit for an investment property.

You still need to qualify for the loan

You can have as much equity as you like but that doesn’t mean you’ll automatically be able to use it as a deposit on an investment property access to it. The bank still requires you to pass their stringent borrowing criteria.

The faster you lower your loan the more equity you have

You can build your equity in two distinct ways, capital growth and debt reduction. It’s simple but true, every dollar you pay off your loan is a dollar you can borrow back to invest. And an added benefit is that you can claim the interest off your tax. Plus as your property increases in value so does your available equity.

We hope you found this information on things you need to know about equity of use. Contact us to have a personal consultation on your equity position and what it means to you when it comes to investing.

Our MD Michael Sloan is an investment property specialist, call us on 0417 577 500 or email: info.richmond@bhgre.com.au to organise an appointment.