Equity can be used to build a large property portfolio and it can even be used to fund your lifestyle. Here are 5 ways to get more equity in your investment property.
What Is Equity and Why Do I Want More?
Equity is the value you have in your investment property that you haven’t yet tapped into. The easiest way to work out how much equity you have in your investment property is to use the following formula
Value of the property (minus) Debt on the property.
If your property was valued at $600,000 and you have debts of $400,000 then you would have $200,000 in equity in that investment property. More on what is equity?
Equity is important for investors because this extra value can be used to improve your financial situation.
- It can be borrowed against to purchase more property (meaning you don’t have to save another deposit)
- It can be used to fund your lifestlye
- It can be used to help you gain another loan with the bank for another investment
- It can be used to pay down debt (if you sell the property)
How Can I Get More Equity?
Here are 5 ways you can get more equity from your property.
Choose a good property to begin with
The saying goes “You make the money when you buy, not when you sell”. Choose a good property in a good area and purchase it at a discount. Make money from the day you sell it by paying less than what it is worth.
Not all properties will sell under market value (very few will) but there are those properties out there if you work hard enough to find a motivated seller and the right property.
By renovating a property you can instantly increase its value and gain equity on the property. Cosmetic renovation are often fairly inexpensive and can add immense value to your home.
Be careful because structural renovations, where the renovation is largely unseen, tend to add less value to a property.
In Australia properties have seemed to double in value every 7-10 years. If you just own one property you are gaining equity on just one asset. If you own 2, 3, 5 or 10 properties then you are gaining equity on more than one asset.
Spreading your risk across different areas means that each year your chances of getting an equity gain are much higher than if you had all your eggs in one basket.
Pay down debt
Equity is the value of the property minus the money owning on the asset. By lowering your mortgage you are effectively increasing your equity in that property.
Many investors do this through the use of an “Offset Account”. Instead of putting money onto the loan you are putting money into a savings account that offsets your mortgage payments. This can be a good options because you have instant access to your finances.
Get your property revalued
Getting your property revalued when markets are high can give you more equity. If your property has gone up in value it is worth getting your property revalued because you could use that extra equity to reinvest, or even if you don’t access the money it makes you look less risky to the banks.
Be careful about getting your property revalued if the market has turned down. If the valuation comes in lower than your mortgage then you might have to pay back some of your loan to get your Loan to Value Ratio back to normal. This could cause major financial issues if you cannot come up with the money straight away