Getting your strategy right – 5. Equity

 

We often hear the phrase “tapping into equity of your property ” as an investment strategy. But what exactly is equity and how can you use it to acquire another property?

Equity has several meanings in the financial world. But simply put, it is the value of an asset—say, a business or a property— after all the debts or liabilities you have on the asset have been paid.

For instance, Judith took a loan for a cupcake business she plans to venture into. The loan amount was $20,000. She used the money to secure a place where she built her pastry shop. Her business became successful and she was able to pay off half of the loaned amount. If we were to compute then the value of her business, it would amount to $10,000. That is her equity.

Equity in property investing

In the context of property investing, equity is computed by subtracting any amount you owe on your property from the actual value of it. If the market value of your house, for example, is $400,000 but you borrowed money to buy that house and you still owe $250,000 to it, the amount of your equity is $150,000.

If suddenly the value of your house increases but you still owe the same amount, your equity will increase, too, even if you haven’t lessened your loan amount.

But the sure way to increase your equity (if the value of your home remains the same) is to reduce the amount you owe on your home. The more you continue to pay off the debt you have against your house, the more your equity increases.

Now why do we need to compute the equity? This is where the most commonly phrase “tapping into your equity” comes in.  Essentially, equity is your asset.  Thus, it is part of your net worth. You may own a property but if you still have a debt on that property, you do not totally own it unless you have completely paid off your loan. You have, however, equity on that property. And that equity, that value of share you have on the property, is what some investors use to purchase another property.

What is home equity

So how do you “tap into your equity”?

While still paying for a loan from your existing property, you can start to invest sooner in another property by harnessing the power of your equity. How do you do it?

Suppose you are eyeing on a property worth $450,00. You found a lender who will fund 80% of the total amount of property. That covers $360,000 of the amount of property. Now you still need additional $90,000 to complete the purchase.  This is where you can tap into equity of your existing property to make the new investment to happen.

So like we mentioned above, your existing property is valued at $400,000 and you still owe $250,000 to it. That leaves you with $150,000 worth of equity.

Now you can only access 80% of your equity. In this case, you are allowed to use $120,000 from your equity but you will only be needing $90,000 to complete the purchase of the new property. Your equity covered the amount needed for you to invest in a new property, You were able to harness the power of having an equity.

Financial Freedom—Finding the holy grail in property investing

Financial Freedom

I don’t think that I know anyone who is investing in property whose aim isn’t to be financially free. For most, this means that they are no longer reliant upon their job or having to ‘go to work’ to support themselves and their family in their everyday living expenses. Of course we would all like to be able to afford a nice house to live in, a nice car to drive, a nice holiday now and again, but at the heart of it, I find when I speak with investors, they mostly want to not have to work anymore.

Most people get up and go to work each and every week day and try not to think too hard about it because, well, it’s all a bit depressing really, isn’t it? Here we are, relatively young and hopefully healthy and we’re spending the best part of our lives doing something that we have to do, that involves making money for someone else and we’re going to have to keep doing it until we’re somewhere near 67 years of age. Sixty-seven!

Vacation timeSo stop now and think about what it would be like if you were financially free. Financial freedom is about buying back your time. What a brilliant concept. Not having to work in a job to earn money to pay the bills means time to do the things that you want to do. The things that are important to you. If you were financially free, what would your ideal day look like? (I do this little exercise frequently!).

Does anyone really make it?

So, knowing that financial freedom is the goal, how does the everyday property investor get there? When we look at the statistics of investment property ownership, it does make you wonder, of all the people who invest in property, just how many of them achieve the goal of financial freedom? Based on taxation statistics, while one in seven taxpayers own an investment property, only 476,000 of those people actually own more than one investment property and the numbers fall off significantly after that for any greater than two investment properties.

Jane Slack-Smith - Your Property SuccessAsk Jane SS of Investors Choice Mortgages and Your Property Success and you don’t need a lot of property to become financially free. In fact in her book Your Property Success with Renovation she outlines a straightforward strategy demonstrating that 2 properties + 1 renovation can equal one million dollars in the bank. Jane herself has built a significant portfolio and is well on the way to being financially free. It’s taken some time, but her strategy is a low risk, measured strategy of getting rich slowly.

Of course this isn’t the only strategy to get you there.  Nathan Birch of BInvested.com was financially free at just 24 years of age after focusing on properties that put money in his pocket from day one of the purchase, whether that be through an immediate equity gain by buying under market value or through positive cashflow with high yielding properties.  Nathan specialised in positive cashflow properties and was able to create a healthy five figure monthly income from his properties that enabled him to quit his job not that long into his investing career.

Many ways to get there

As you can see from just these two examples, people use different strategies in property to obtain financial freedom for themselves.  Others have made their money through renovating and selling properties, developing property, coordinating vendor finance deals.  Some have been strategic in their method and approach, others were just lucky to ride a wave of massive capital growth (oh, I should be so lucky!).

I’m a great proponent of the ‘many ways to skin a cat’ theory of property investing, which basically means that there are many ways for you to be successful and people do achieve their goals using different means.  What is important here is for you to decide upon the strategy that you are going to use and to remain focused on not only your goal, but your chosen method to go about achieving it!  Many investors, including me, have been guilty of not beginning with the end in mind or starting out with one strategy only to change or not necessarily measure up each purchase in terms of their goal and strategy.

Check out next post wherein we will discuss goals, strategies and the factors that determine your approach to investing.

 

Brisbane Purchase Case Study Part 3—Narrowing down locations

 

We continue our series on our latest Buyers Agent client, Luke, an everyday property investor who agreed to have us document the process we will undertake as we assist him in buying an investment property in Brisbane.

Luke has set his buying criteria ($350k budget; new to near new type of property) but when it comes to target location, he has  quite a wide range of choices. So in this part of the series, we dig deeper and further assess locations in Brisbane that have properties that meet those criteria.

In narrowing down target locations, we factored in Luke’s budget and his preference for the property (not older than 5 years). With those two major requirements, we were able to eliminate the other areas from Luke’s initial list and came up with three areas that meet his buying criteria. The said areas are Moreton Bay Region—particularly Rothwell and North Lakes; Ipswich, particularly the East Ipswich region; and Fitzgibbon.

Meanwhile, in regional Queensland, we reviewed major towns and finally draw up a list of regional towns that meet Luke’s criteria. These are Rockhampton, Toowoomba, and Townsville.

We presented a location analysis for Luke to review our list of narrowed down target areas. These location analysis reports contain an overview of each of the location, the numbers that make up the area such as population, demographics and property data; and the industries that thrive in the location. Aside from these data, we provided in the reports a pros and cons analysis of the location as well as photos of sample properties.

After reviewing the location analysis reports, Luke decided on focusing on the Brisbane locations for this purchase. That said, it’s going to be a choice amongst  Rothwell, North Lakes and Fitzgibbon. Now to further narrow down our target to THE actual location of choice, our next task is to delve deeper into those three areas. Tune in to the next part of this series to find out how having focus can help in determining which amongst the possible locations would suit best your buying criteria.

Build your portfolio, know your market and maximise what you have

 

Check out this property investing news update from Everyday Property Investing

 

Highlights in this episode:

00:17  Webinar: How to build a successful property portfolio with Jane Slack-Smith. Register now! 
01:12   Cool tool: Understand your market using the Census website
03:01  Suburb at-a-glance: Alderley, Brisbane
04:20  Quick tip: Inspired by Jane Eyles-Bennet from Hotspace Consultants—look at potential ways to get value out of your own home

EPI 062 | Investing in the Hunter Region with Jo Chivers

Things we talk about

In today’s episode we learn why the Hunter Region is an attractive region for investors by speaking with Hunter Region property expert, Jo Chivers.  Jo has been project managing property development projects for clients in the Hunter Region for about 12 years now and shares with us her key investment areas and the sort of projects she is undertaking in the region.

  • Investing in the Hunter region—why is it so popular amongst property investors?
    • Diverse economy
    • Known for its coal mining
    • Tourism—day spa, vineyards
    • Growing population
  • Areas in Hunter Region that appeal to investors

Quick tip and action

 

 


Tips on buying products during property investing seminars and organising your life

 

Checkout this property investing news update from Everyday Property Investing

Highlights in this episode:
01:09  When to buy products during free property investing seminars
01:54   A cool tool to help you organise your daily tasks
03:41   Quick Suburb Review: North Lakes, Queensland
05:31   Next registration date for Everyday Property Mastermind course 
05:50  Quick tip: Insurance broker

Everyday Property Investing Magazine — Issue 5 — Positive Cashflow with NRAS

You’ve probably heard about it but never considered venturing into it since it’s a government scheme and we all know how government schemes can be—they’re sometimes not clear about the rules.

But that doesn’t hinder us from exploring this type of investment opportunity. So in this issue of Everyday Property Investing Magazine, we look at two of the property investing schemes by the government—the National Rental Affordability Scheme (NRAS) and Defence Housing Australia (DHA).

For  NRAS, we interviewed Jo Brown of NRASRealestate.com.au where she shared the prospect of investing in properties at potential growth locations whilst providing a positive cashflow.

Meanwhile, we look at DHA type of investing—its features, how it works, and the pros and cons.

EPI Magazine is a great app to have for property investing enthusiasts who want quick resources from their iPads. Every issue is packed with  property investing features written in an everyday property investor’s lingo—something even a beginner investor can understand! All these knowledge is easily accessed from iTunes.

Here’s the best part for EPI members: you can have a free 12-month subscription, just email me for details. You can take a sneak peek at the magazine and the instructions for using the free 12 month subscription code here!

 

Selling houses, finding the ‘next big thing’ with heat maps, DHA

 

Check out this property investing news update from Everyday Property Investing

Highlights in this episode:
00:27 New podcast episode out! All about selling houses—from the decision to sell to preparing and pricing your property
01:02 Cool tool: Heat maps that will show pricing and growth patterns and help  you identify undervalued locations or potentially the ‘next big thing’!
02:06 Want to be part of a small online group collaborating, sharing, and increasing knowledge about property investing? A few spots left for Everyday Property Mastermind.
02:23 Is DHA investing for you? A quick glance at the pros and cons

EPI 061 | How to sell your property and get the best results

Things we talk about

  • Why sell your property
    • Need to sell!
    • Opportunity cost
  • Selling your own home without an agent
    • Websites to assist: For Sale By Owner, Buy My Place
    • ✔ Pros: Save on commission
    • ✘ Cons: You need to market, you are not objective, you need to show people around your home
    • My advice: Don’t be a tight arse—fork out the money!
  • Choosing an agent
    • Past experiences you’ve had with agents
    • Word of mouth
    • Conversation and communication
    • Matching philosophies
    • Fees: Don’t quibble over 0.5%, pay for advertising
  • Pricing and Strategy
    • Auction versus Private Treaty
    • No Price, Price Range, Set Price
    • Leave room for negotiation because it will always happen
    • Realistic price setting—
  • Preparing your home
    • Street appeal
    • De-clutter
    • Finish off the half-done jobs
    • Focus on the things that make you money or make you a sale
  • Closing the deal
    • The first offers you get are often the best
    • Weighing up an offer
    • Look at the conditions as well as price

Quick tip and action

 


Everyday Property Investing Magazine — Issue 4 — Mining Towns: Boom or Bust?

We’ve heard and read about  the risks of investing in mining towns—from the articles we read and the stories relayed to us. It is, however, different when you get on the ground and witness firsthand the impact of mining on a region whose economy is driven by it.

In this latest issue of EPI Magazine, we take a look at some of the key mining towns and present our readers with the risks and rewards of mining town investment. Talking about risks, we also present some ways to mitigate those risks should you decide to invest in a mining town region.

If you’ve got an iPad and would love to have property investing reading resources, EPI Magazine is a great app to have. Every issue is packed with  property investing features written in an everyday property investor’s lingo—something even a beginner investor can understand! All these knowledge is easily accessed from iTunes.

Here’s the best part for EPI members: you can have a free 12-month subscription, just email me for details. You can take a sneak peek at the magazine and the instructions for using the free 12 month subscription code here!