Equity - what it is and ways to create it
Check out the my millennial money property episode where Glen and John deep dive into the concept of equity:
What is equity?
It’s the difference between the value of your property, and the value of the loan/mortgage you hold against that property.
E.g. Your property is valued at $500k. Your mortgage is valued at $300k. Your equity is the difference between those figures.
$500k - $300k = $200k
Your equity is $200k.
Equity is essentially ownership.
If I have that equity, can I go and use it all? No, typically lenders will only allow you to utilise a percentage of that amount (if, for example, you wanted to purchase another property using that equity). Usually up to 80% of the total equity available. That is also provided you have the income to help service that next adventure.
Here are some ways you can create equity:
Tip 1: buy at discount
Buy well. Do your research. You’ve sorted the location and the type of property you want to purchase. When assessing a potential property it’s important to ask: what is the property worth? What are other properties similar to this going for on the market? And can I get this property at a discount? If you’re able to snatch a property below the asking price then you’re creating value on your way in to owning that property.
John’s tip
Don’t just put a few offers on properties. Look at 100 properties. Put an offer on 10. Walk away with 1 property in the bag.
Tip 2: add value
Can you extend, renovate, build or develop what you have purchased? Can you add value to the asset? Be aware that in order for this strategy to work you need to add value in a way that is smart – don’t do rubbish renovations and just assume it will add value!
John’s tip
Focusing on external features increases the sale value of the home. Focusing on internal features increases the rental value of the home. Don’t spend too much money on the renovations – in an ideal world you want to get $3 back for every $1 you spend.
Tip 3: capital growth
This involves allowing market value to rise on top of what you paid for the property. E.g. you buy a property for $400k. The value of that property increases with the market to $500k. However, this strategy relies on the fluctuations of the market and unknowingly you may buy in a market that tanks. This strategy is the one most out of your control.
Looking at investing in property but unsure about where you stand and what your next steps should be? Book in a clarity call with John by getting in touch.
If you’re looking to take your property journey to the next level, check out John’s online property course.
