How to use equity to grow your investment portfolio

When it comes to investing in real estate, funds acquired as part of equity in one property can be used to purchase another property…and the best thing is that you can continue to access the equity in each property to further grow your portfolio! Let’s take a look at exactly how to use equity to diversify your property portfolio. 

What is equity?

Equity is the difference between the current value of a property and how much you owe on it. For example, if your home is worth $500,000 and you still owe $220,000, the equity is $280,000. And accessing this equity is the basis of the method you can use to grow a property portfolio! It can help to boost your wealth while at the same time diversifying and spreading your risk, which is key to creating long term financial success and stability. 

Using cash to purchase property

Even better, if you’ve owned your own home for a significant period of time, it has likely appreciated in value…potentially to the point where you can quickly tap into the accumulated equity to support the purchase of another property!

That’s the discovery that countless financially savvy Australians are making – many finding that prices have risen so dramatically in some areas that they can refinance their homes and use the equity to fund a cash purchase in a lower-valued (or up and coming) location!

These purchases are easy, uncomplicated and best of all, fast! The acquisition of the next property is simple when the refinancing is completed. After all, you’re an appealing buyer because you don’t have another loan to deal with. And when you can settle fast and reduce the purchase process, you place yourself in a better negotiation position. 

Funding a new loan 

Likewise, you can use the equity as a deposit for your first (or next) investment if you don’t have enough equity to buy another property outright with cash. 

For example, if your present property has $100,000 in equity, you can borrow money against the property – in most circumstances, lenders will allow you to borrow up to 80 per cent of that value. So in this example, you’d have $80,000 to put towards a new loan! You could use that $80,000 to make an offer on a property worth up to $400,000, growing your assets and providing you with another property to leverage in the future when it too has increased in value. 

Positive cash flow and positive gearing

A positively geared investment property is one that costs you less than the amount it earns in rent. This provides you with a steady income that you can use to pay off other obligations and costs. You can continue successfully using this method time after time, especially if each of your investment properties generates a positive cash flow.

In the unfortunate scenario that a property happens to decrease in value then number of properties you may buy could become limited, while straining your own budget. This is generally only a short term issue during certain phases of the property cycle.

NB This is where professional advice from a trusted property expert can ensure that you’re purchasing the right property at the right time – that is, one that will appreciate faster and allow you to grow your portfolio safely and quickly.

Rising property prices  

Most properties appreciate in value over the long term due to general inflation and economic and property cycles. But if you want to enhance the value of a property quickly, there are specific tactics you can employ. 

The most obvious strategy is to purchase a property that needs a renovation to boost its value. These properties are frequently offered at a lower price due to the time, money and effort required to bring them up to scratch. However, when you’ve successfully completed the reno, you’ve not only improved the property’s worth but also its achievable rental revenue. As a result, your cash flow improves, and you quickly build up the equity needed to support the purchase of your next investment property!

Keep an eye on your investments and take care of your tenants

If you’re serious about using equity to build a prosperous investment portfolio, you need to keep an eye on your individual properties. It’s also crucial to keep an eye on the market in general, as well as your own personal finances. Maintain detailed records of your income and spending so you’re on top of where your money is going.

Take good care of your property and select tenants who’ll do the same. Likewise, look after your good tenants. If you engage a property manager, keep an eye on them and replace them if your properties are being ignored. It’s difficult to make your properties work hard for you if you don’t look after everyone involved. 

Remember, you can greatly extend the life of your assets and provide well for your future by carefully selecting your properties in the first place and then leveraging their equity.

For additional information about how Hamish and the team at One Haven can help you keep an eye on your properties and your wealth into retirement, contact us so we can get started today!