Discover the power of equity in your investment property to access tax-free money and grow your real estate portfolio. This blog breaks down the process into simple steps, helping you understand what equity is, how to calculate it, and how to use it effectively. Learn more with examples and strategies to make informed decisions and maximize your investments.
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Did you know that you can access tax-free money by holding an investment property?
In this blog, I want to share with you exactly how this works when you're taking out equity from one property to either:
Now, using equity…we've all heard about this, right?
There are people online saying: “Oh, there’s no deposit. You require no deposit to purchase your next investment property. This is how you do it.”
Or…
“Hey! There's a way that you can use this equity, which would be tax-free money, to do whatever you like with it.”
Well, I'm going to break it down into simple steps as to:
Now, the first thing we need to understand is:
Equity is just the difference between the home value minus your liability, which is the loan.
It's very similar to calculating your net worth. When you look at your top number, it's basically what your assets are all worth minus whatever your liabilities are, and that portion is your net worth.
It's the exact same thing when it comes to an investment property.
The only difference I would say is that in order for you to find exactly what the market value is, it will be very different from:
Versus…
Now, believe it or not, every bank is different in how they assess one individual property's value.
I've heard of situations where you could go to one bank, and they may give you a valuation on your property of $600,000, but I could go to a different bank on the same day and get a valuation of $680,000.
This is where the importance of having a mortgage broker really comes into effect, because imagine, you go to your local bank branch and you say: “Okay, well I bank with you guys and this is how much my property is worth. Cool, that's all I have as an option. Thank you very much.”
Versus...
When you go to a broker, they can go and apply to multiple banks, with multiple valuations, and so what happens is you get three or four different choices, and you can then assess what is the next best move for yourself.
If you're interested in getting help with a mortgage broker, definitely email me at ravi@searchpropertyau.com.au
Now that we know what equity is, it's more about:
Let's use an example and then from there, we can branch out.
Let's assume you buy a property for $500,000.
You decide to put a 10% deposit down, which would be $50,000.
This means your loan amount is $450,000.
In most cases, banks will allow you to borrow up to 90% of the entire value.
So in this case, 90% of $500,000 is $450,000, and that would mean: You could borrow no more after that and your loan-to-value ratio is 90%.
Although at this point $50,000 being cash has been put into it, it is technically equity but you can't touch it. So usable equity is different. It's essentially figuring out what 90% of the equity is. This is most likely what your usable equity actually is—what you can access.
Let's break it down with this example:
Let's assume that $500,000 property has now done really well and gone up by 10%.
You bought in the right location at the right time.
The property is now worth $550,000.
Your debt, however, remains the same because you may have decided to go interest only.
Now the property value is $550,000, and the debt that you have is $450,000, which means your equity is $100,000.
However, not all of it is usable. If you are to divide this number, what you'll find is: 450,000 / 550,000 = 81%
This means your loan-to-value ratio has gone from 90% to 81%.
Now as I mentioned before, you can access up to 90% at most banks, so you could go and say to the bank: “Hi! I would like to borrow some equity.”
If you have the borrowing capacity, you'll be able to go and borrow that extra bit there. So the best way to figure this out is with a formula.
Yes, I didn't enjoy Math formulas back when it was Pythagoras Theorem, and pi and this and sin—I’m not sure what I'm talking about right now. I didn’t enjoy that but I definitely enjoy this and I have a feeling you will too.
So what you want to do is get the value multiplied by 90% minus the loan value.
In this example, the value is $550,000 multiplied by 90% = $495,000. Then, you would minus your existing loan, which is $450,000
This means you have: $45,000 usable Equity.
This means (depending on your borrowing capacity), you can:
Now, what's crazy is that it's actually tax-free.
Yes, I know some people will jump in the comments and say: “Oh, but you still have to pay interest on that and whatnot,” but it depends on what you're doing with that money.
If you take out $45,000 and decide to blow it in Europe, well, okay, that's a pretty silly decision.
However, if that $45,000 that I'm paying, maybe 6 1⁄2 or 7% on, I can use it as a deposit to purchase my next property, which is going to grow by a lot more than me having to pay 7% on such a low principal. You need to strategize how this actually makes sense for you and you can't just say:
“I've got equity, I'm going to use it, and I'm going to use it for dumb sh*t.”
You use it for dumb sh*t, you get dumb results.
Now, although $45,000 doesn't sound like life-changing money, it really does when you have an investment portfolio.
So imagine going out there and saying: “Okay, I've got enough of a deposit to purchase two properties,” and now you've got a million dollars' worth of real estate.
How long do you think it would take for you to now save up to buy another million dollars' worth of real estate?
Well, if that existing million dollars' worth of real estate is experiencing compounding growth, you might find your way to purchasing more investment properties, and now you suddenly have a portfolio worth maybe $2 million.
However, if you have an investment portfolio of $2 million and it goes up by 10%, that’s $200,000 of compounding growth! A year after that, it'll grow even more if you have 10% worth of growth or more.
Now, what's crazy is when you put it into context: if I could only borrow 90% of that amount, and it works out to be accessing usable equity of $180,000, do you know how long it would take for you to save $180,000?
That would be the equivalent of probably making an income of like $350,000 to $400,000 every year!
This is why the rich get richer because of the system and the rules of the game.
I didn't make up the rules.
The rules were here long before I was born and in fact, the rules have actually gone in the favour of stopping the rich from getting richer, with the Australian Prudential Regulation Authority (APRA) coming in and implementing all these changes.
If those changes weren't around, affordability would be a bigger concern now than ever before.
I know it's super difficult to get ahead, but this is one of those strategies that rich people are using, and they're using it effectively.
If you can get your head around knowing how an investment portfolio is actually very beneficial to you in growing wealth, then you will outperform 99% of investors out there.
If you need help in finding the right properties and knowing how to execute this, then definitely go and check out our website at SearchPropertyau.com.au.
At Search Property, we've helped more than 400 clients purchase their investment properties whether:
We're so excited to bring you so much value but also at speed, and that is the key—speed is the key in this market right now.
So if you're interested in getting help, please do reach out. If you're interested in more blogs like this, then visit our website. I also make videos on YouTube, so subscribe if you haven't already.
I'll catch you guys in the next one.
Thanks, guys!
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