Equity is an integral part of an investment property journey, especially if you are looking to follow a similar path to B.Invested founder Nathan Birch.
Investing in property for below value means that it should not be too long before you can access equity to put into your next investment.
If your property has gone up in value by $50,000 for example, a lender will let you use a portion of that as a deposit on another asset.
It’s no secret that Nathan built his foundation portfolio over a number of years by buying affordable properties on city fringes, releasing equity as soon as he was able and leveraging straight into his next asset.
It is a way to save one deposit and turn it into a multiple property portfolio, if done correctly.
You’ve got to make it real
The thing about equity is that it only exists if you get a valuation and release it for use. If you wait a few months and, for some reason, the market goes downwards, some of that potential equity could be gone, at least for now.
Think of the last two years. Properties shot up in value all over Australia between 2022 and early 2022. Many home owners and investors would have accumulated significant equity in that period. But since rates began to rise in April, data companies are saying values have gone down by about 10% on average across the nation. If you had refinanced in April, you would have access to 10% more equity on average than if you had waited until now. Investing that equity into a below value property purchase could actually have safeguarded your wealth against the 10% fall, while also making you money in rental return.
Other factors to be aware of
Releasing and claiming your equity means it belongs to you and you can choose what to do with it. It is worth considering, because it’s not just falling values that can get in your way. Sometimes, government policies change, external events happen (think Ukraine war, pandemics, massive inflation) which you are not able to control.
Many people could have pulled out money in equity from their properties in recent years, but then found that banks had tightened lending criteria and when they came back needing that equity to make a move or take an opportunity, they could no longer access it.
By accessing your equity when you can, you can go ahead and use it, or don’t if you don’t need to. It’s still sitting there like a security blanket.
Big picture approach
While knowing about and thinking about equity is important, it is still just one part of your overall strategy.
You need to understand what you are trying to achieve by building that property portfolio. What are the risks present in your life that you need to protect yourself against?
Getting your finances right from the start is crucial, because as you go further along your investment path, it can become harder to reverse poor finance structuring. By identifying an end goal and working backwards from there to create a map to your destination, you will be less likely to hit a borrowing brick wall.
It’s a good idea to look at your finances strategy and review your debt strategy at least once a year to see if there’s something you can tweak or improve to benefit your personal position. It’s a way to minimise risk and put yourself in the best position for growth and to take advantage of opportunities in the marketplace.