How can new investors leverage equity?

“Many people don’t realise that you don’t actually have to sell a property to extract its possibility. What you can do is to refinance or take equity out,” Mr Gupta said.

Here are the four steps to follow to build wealth through property using equity, according to Mr Gupta:

1. Know the equity of your residential property

“You could be living in Melbourne or Sydney and live in a property bought five years ago for, say, $500,00 or $800,000. Now, it could be worth a million dollars. How can you use that to build wealth?” he said.

Mr Gupta suggested you go to a bank or a mortgage broker to ask for a house valuation. According to him, they will do this for you for free. To determine your home equity, your mortgage balance will be subtracted from the current valuation of your home.

2. Refinance your house

For example, the bank or broker says your home equity is $300,000. You can use this equity to take on a loan from a bank.

According to the investor, you could hypothetically receive a $200,000 loan based on your $300,000 equity.

3. Use your equity to make money work for you

Based on the above hypothetical, Mr Gupta opined that such an amount is “sufficient to buy you two or three properties under $500k worth $1 million at good locations”.

From a $200,000 loan, you could have access to a $1 million property portfolio. He said that in five years, your portfolio could grow in value. 

According to Mr Gupta, it’s reasonable to expect growth of up to $500,000. 

From his perspective, that’s “a reasonable 50 per cent growth from a base of $200k or 2.5 per cent growth or 250 per cent return on investment”.

But to make this property investment dream a reality, he stressed the importance of having a plan, which brings us to the next step.

4. Create a strategy

Mr Gupta suggested laying down your cards and thinking of your budget for the properties you plan to invest in, how you will divide your equity among these investments, and identifying the yield you’re looking for.

In addition, he asked that you determine your risk appetite: do you want to be an active investor by being hands-on in subdividing or renovating the property, or do you just want to be a passive investor?

The next step in Mr Gupta’s strategy is selecting suburbs. Out of the 15,000 suburbs in Australia, where do you wish to purchase property? 

He highlighted the importance of looking at data showing suburbs with positive cash flow and capital growth.

From your selected suburbs, he suggested picking out the best pockets for investment because, in reality, there will always be “good and bad streets and properties”.

Once you’ve shortlisted properties, it’s time to negotiate and understand the tax and legal side of things. There are ways, he said, for you to save on tax, and this can also be done by knowing the best legal entity to take on when purchasing properties.

For this part, Mr Gupta quipped that you don’t have to be scared if you have zero knowledge about these things. You can build your dream team of mortgage broker, conveyancer, solicitor (if needed), and property manager to help build your property portfolio.

He concluded with a reminder to keep things simple because, in five years, you will manage to have “built hundreds of thousands of dollars of passive income by capitalising in the 2020-2021 property boom”.

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