What your equity can do for you
The Sydney-Melbourne property boom has created 30 to 50 per cent equity in your home. Why not use this equity to invest in the next growth markets without costing you a cent?
Blogger: Paul Glossop, director, Pure Property Investment
Over the past three years the Sydney and Melbourne property markets have created huge windfalls for property owners – some markets have risen as much as 50 to 70 per cent. However, most home owners are doing nothing with their new found equity.
People, it's time to wise up and put that equity to work to create wealth in other property markets.
Here is an example of an investor with $200,000 in equity who managed to purchase three fantastic properties within six weeks. Each of these properties is positively geared in prime growth markets.
The breakdown is as follows:
Principal place of residence (PPOR) was purchased in 2012 for $320,000 with a 20 per cent deposit. As they have been making principal and interest payments on their loan, the loan is now $221,000. The PPOR was valued in March 2015 for $528,000.
Our client had $208,000 in equity and the option of continuing to pay down the mortgage for the next 14 years until they owned their home outright.
Based on their PPOR's current valuation at $528,000, if this property doubled again in 14 years they would have a property valued at $1,056,000. Given they would have by then paid off their home, they would have an available equity of $1,056,000.
For most Australians, this would be sufficient. However they devised a strategy for their money to work harder and smarter – they have taken their equity to reinvest while continuing to pay off their PPOR.
To avoid paying lenders mortgage insurance they were able to use $166,000 and avoid additional costs and risks. With that they have bought three properties in the past six weeks, ALL positively geared and primed for capital growth.
The properties’ financials are below:
Property 1: 4-bedroom brick home (eight years old)
Purchase price: $248,000
Rent: $330 per week
20 per cent deposit and stamp duty and other costs: $54,400
Cash flow per annum after all expenses: + $1590 per annum
Property 2: 3-bedroom brick townhouse (seven years old)
Purchase price: $220,000
Rent: $335 per week
20 per cent deposit and stamp duty and other costs: $48,250
Cash flow per annum after all expenses: + $2170 per annum
Property 3: 4-bedroom brick home (six years old)
Purchase price: $289,000
Rent: $350 per week
20 per cent deposit and stamp duty and other costs: $57,950
Cash flow per annum after all expenses: + $1053
They used $160,600 of their PPOR equity to buy these three properties. They will pay $7,227 total per year in interest on their line of credit of ($160,600). However, they will receive $4,813 in positive cash flow. After all said and done, the three investment properties will only cost them $2414 per year, or $46 per week. We also haven't factored in any depreciation on the three properties, which could mean their investments are positively geared from the outset. Keep in mind, a few rent rises are likely and their payments should decrease to $0 after a few years without the added benefit of depreciation.
So...
With the three recent purchases and their PPOR, our client now has a property portfolio with a total value of $1,285,000.
Looking ahead in 14 years time, if they continued to pay their LOC as interest only and their PPOR as principal and interest, they would have a total mortgage of: $757,000.
If that portfolio doubled in value in the same 14 years, our client would have a portfolio value of $2,570,000. If we deduct the outstanding mortgage, their total equity equates to $1,813,000!
Let’s bring our attention back to the original scenario, where they would have $1,056,000 in equity if they did nothing with the equity they had in their PPOR. If we compare the two scenarios, our client is better off by $757,000. That means they have gained over $54,000 a year!
Now, I know that was a long explanation. But in a nutshell, that is what you can achieve by utilising your unused equity without denting your lifestyle.