Equity is one of the most important parts of property investing. Understanding it, accessing it correctly and using it intelligently can make a huge difference to your wealth creation (and how long it will take before you can live life on your own terms). Once you begin your property investing journey, you need to be aware of the equity you have created and think about the right time to pull it out and use it. You also need to be aware of its tendency to ‘disappear’ during market fluctuations.

Get a strategy in place

Every move you make as an investor should be a stepping stone towards achieving your goals. So you need to outline your strategy from day one. What are you trying to achieve? Do you want to use equity in your own home to help your kids with a deposit? Or do you want to buy 10 investment properties, have them pay themselves off with rental income and then provide you with a passive income stream in retirement?

There are many different goals in property investment and many different paths you can take. If you are looking to build a large portfolio, equity is your friend.

Be aware of your equity

If you have been paying off property, whether an owner occupier or one or more investment assets, for any amount of time, chances are you’ve accumulated some equity. Equity is the difference between what your property is worth and what you owe on it. So if you get your property valued and the bank says it’s worth $400,000, for example, but you only owe the bank $200,000 on it, then you have $200,000 in equity.

Useable equity

You can use part of this wealth without having to sell the property. But you can’t use it all. Banks won’t let you access the full amount to invest because it would be exposed to too much risk if there was a dip in values for your existing property, or the new one that you purchase. Instead, they will allow you to access a portion of it. Usually around 80% of your existing property’s current value, minus the debt still owing.

So in the above example, 80% of the value would be $320,000, minus the debt of $200,000 still owing, would mean you had $120,000 worth of ‘useable equity’. That’s more than enough for a large deposit on any number of positively geared properties around Australia.

Get it while it’s hot

Everyone’s situation is different and this is NOT financial advice, but when the market has been growing and you find you have access to some equity, it’s not a bad idea to grab it, even if you don’t have immediate plans to invest. Reason being, that if you wait six months or a year, and there is a market correction, you may find that equity is gone. Policies change, markets change, property markets change and valuations change. Suddenly, it’s like that equity never existed in the first place and you have to wait for the next growth cycle for another chance to leverage your wealth.

Cash out refinance

But if you’re not planning to invest, how can you access your equity? The answer is via a cash out refinance. Lenders will often allow you to refinance your mortgage to a higher balance and pull out the equity in cash, which then sits in your account. If structured correctly, you will only have to start paying interest on that cash if you actually use it. If you don’t need to use it, you don’t have to. It’s still sitting there and it won’t disappear if the market turns.

Stay on top

It’s a good idea to look at your position at least once a year, especially as your portfolio begins to grow. Has some equity appeared somewhere at the right time to seize another opportunity? How can your money work harder for you?

With inflation, every dollar you can access will be worth less the next day if it’s not invested. If you don’t take advantage of your equity, you might miss out on the opportunities that will help you reach your goals. If you need help figuring out what your strategy looks like or you need more information, reach out to the Investor Relations team at B.Invested.