The Property Investor Playbook

Unlocking The Power of Home Equity For Smart Investments - The Property Investor Playbook

September 11, 2024 • Liviti Property • Season 1 • Episode 6

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Unlock the power of your home equity and learn how to make it work for you! Ever wondered how to turn the value of your home into a stepping stone for future investments? 

Join us in this episode of The Property Investor Playbook as Lara and Daniel demystify the concept of equity, breaking down the crucial differences between general and usable equity. They explain how banks determine the amount of equity you can access and provide a clear, mathematical example to help you calculate it yourself. From leveraging equity for purchasing additional properties to starting a business, we emphasise the importance of using this financial tool wisely to grow your wealth.

Facing the daunting home buying process? We've got you covered. Our discussion highlights the significance of having a reliable support network and knowledgeable brokers to ease the journey. We delve into the strategic considerations you need before tapping into your home equity, stressing the potential benefits of investing in appreciating assets like property. Get practical advice on planning with financial strategists and aiming for capital growth in high-demand areas. 

Whether you already own property or are starting with savings, understanding current financial market trends and getting your financial position right are key steps to successful property investment. Tune in and equip yourself with the insights to navigate your property investment journey with confidence!

Speaker 1:

Welcome to the Property Investor Playbook. I'm Lara.

Speaker 2:

And I'm Daniel. We're going to show you, step-by-step, how you can grow your wealth.

Speaker 1:

Welcome back, Daniel.

Speaker 2:

I'm back.

Speaker 1:

We had a short and sweet episode today, a little Q&A with you.

Speaker 2:

Yeah, it was fun. Actually, it was a little game about equity. That's the flavor of the podcast, I assume.

Speaker 1:

Yes, it is. What's the game?

Speaker 2:

You know I like playing games. The game is understanding how you can make money and get rich. Think it's gross. Build wealth, yeah, build wealth. Start your little journey, see how you can up your level, get to level one, two, three, four, five and buy as many properties as you can.

Speaker 1:

We need to do that, we need to gamify it. Definitely. I like it. We do that with my team. We have a tool that we use for some of our content writing and it scores you out of 100 and goes green when you get to a certain level I need that competition.

Speaker 2:

It's like. It's like those games when you're playing your computer how fast can you type?

Speaker 1:

yeah I need that, so we should do that for property, definitely yeah um, we jump into a few questions with you, dan, about equity, and you know what is equity and how people can take out equity, yep, and then what they should do with it as a smart investment. So it'll be a really interesting one to dive into.

Speaker 2:

Put your seatbelts on, get your pen ready or your digital tab, and let's go.

Speaker 1:

All right, let's go, Hi Daniel.

Speaker 2:

Miss Lara, how are you today?

Speaker 1:

I'm good. How are you Always?

Speaker 2:

fantastic, never a dull day in beautiful paradise.

Speaker 1:

Good to hear it.

Speaker 2:

It's the only way. It's the only way. What are we having planned for today?

Speaker 1:

Today it's just the two of us. Okay, no guests.

Speaker 2:

Just us guests just us.

Speaker 1:

I thought we might do a little q a with you. Can you play some games as well? What?

Speaker 2:

are we playing? Ask, ask away. I'm sure we'll make a game as we go you can come up with the game, no worries.

Speaker 1:

um, no, after talking with you and the team a couple of times this week, um, there was kind of an overarching theme of equity, yeah, and a lot of people don't know what equity is, or don't know that they have equity available to them or how to use it. So I thought this would be a good opportunity, since it is just the two of us, to go through what equity is, how people can use it, how we can help them use it and, yeah, go from there.

Speaker 2:

Let's kick it, so let's start off with the basics.

Speaker 1:

What is equity and how do you define equity?

Speaker 2:

all right. I think the easiest way to explain equity without overcomplicating it equity is the value you have in your home minus your obviously your debt, your liability. So equity is as good as cash. So you may have say, for example, your home is worth a million dollars but you have 200k of a mortgage on it. You could potentially access up to 800K or maybe a bit less around that, and it is as good as cash. You could use it to buy another property, buy a car, go on a holiday. I think people feel like they have to sell their home to access the equity. But talk to your banker, your broker, whoever your support system is. Equity can be useful whatever you like, as long as you're not doing something silly, but let's just, let's put that out there.

Speaker 1:

Yeah, but yeah, it's just. Equity is as good as cash. It's cash sitting in your property. Yeah, right, so equity is the value of your property less any debt that you have on it. Perfect okay, as simple as that amazing, and there's a term that's thrown around a lot. What is usable? Equity, then, and is there a difference between usable equity and equity. That you just explained, okay.

Speaker 2:

So we explained equity. Now you need to access the equity. You need the banks, correct? So there's about 80, 90 of these different little banks, lenders, financial institutions. You could access potentially up to 90% equity 95% if it's owned, occupied and some other little tips and tricks in the mortgage world. But you could access let's just use for this example up to 90% inclusive of LMI. You can go down to 80% without any LMI.

Speaker 2:

So we want to keep it basic for this explanation. You can go up to 80% of your mortgage, I mean of your house home's value, sorry. And then there's a mortgage insurance, which is that insurance you pay to access a bit more equity. So up to 80 banks will lend you of your equity. If you want to go a bit over that, you want that 10 more for whatever reason, which it can be good if you use it correctly, you may need to pay a little lenders mortgage insurance fee, which your broker banker can elaborate on that a bit further okay, could you give maybe a bit of a mathematical breakdown or an example of how we would calculate usable equity?

Speaker 1:

then Sure.

Speaker 2:

Yeah. So let's just say you have a home paid off, so it's 800k Paid off home. You want to access all your equity, so you can access up to 80% of the equity, so 800k worth. So if your property is worth a million dollars, nothing going on it, 80% of that property's value is 800 000, correct? Yeah, so you could access the usable equity in your property and a lot of banks will just give you that equity and you could use it to buy another property, um, start a business venture. Obviously there's like restrictions. You may need to provide a contract of sale, you may need to adhere to the bank's conditions, but that's your usable equity. You could go up to 80 of your property's value and use that for your next purchase.

Speaker 1:

Okay. So if let's stick with the same numbers, then If we had a thousand sorry, a million dollar property, and 80% of that is obviously 800,000. If I still had, let's say, 500,000 owing to the bank already, then the difference is 300. So I can use $300,000 of equity Beautiful, perfect, perfect. I love round numbers.

Speaker 2:

I guess sometimes, when you explain it, your mortgage is going to be perfect, like you're going to value your home and be 1.25, 1.44, 740.

Speaker 1:

So using that example, and then you probably owe like $498,000. Exactly.

Speaker 2:

So just the message that we want to portray across that equity is as good as cash in your property. So use it, buy property, get rich.

Speaker 1:

Yeah, perfect. How should people start to evaluate their situation on whether they have equity or if they have enough equity? What should they start to look at for themselves?

Speaker 2:

Okay, I guess the best way for me to answer that question is I'll tell you, like the last two, three people who are speaking with same exact scenario, they don't know how much equity they have in their home. So where do they start first? People just go on. They just google their property address, they go on real estatecom, domaincom, and this kind of tool comes up. Little do you know. If you speak to um, the brokers or ones that we use quite well, that know how to value your property correctly, you might have maybe 100, 200, 300k more in some circumstances. Yeah, let's use my last two clients husband and wife, mid 40s. They had a property South West Sydney. The RP data or the realestatecom valuation tool, came up at about 1.2, 1.25 mil, believe it was. I think it was 1.25. Went to our brokers because I want to kind of access that equity. All of a sudden the banking valuations they did two went to two banks 1.4, 1.45. Wow, all of a sudden they can access a bit more equity.

Speaker 2:

So that purchase that they really wanted. They can finally get to it. But they would have never known if they didn't put themselves in that position to kind of get towards that. So when you're just Googling yourself or you're doing your research, you may feel like it is the right way to speak to that professional. They'll know exactly how they can, the little tips and tricks to get them, to get you that valuation at the rate that you want it to be. Yeah.

Speaker 2:

So obviously it's all depending on the market conditions, your property, all that, all those kind of little concerns. But you need to speak to your support network and let just assess them as much as they can. Write the information down, tell them, speak to the broker.

Speaker 1:

Tell them this is what I want to do go to the broker banker, whoever you use, and give a shot from there okay, and if they're, I guess, getting a valuation of their home to get more information about how much equity they have, will that impact their credit score or, you know, impact their finances at all?

Speaker 2:

um, yeah, so evaluation doesn't impact your credit. So, um, I would, I would highly recommend, before you even go into the mortgage process of it, you need to know what value, what value you can get in your home yeah if you're only going to get, say, 800k, but you owe 700k, you might not have any any much usable equity and you may not get that strategy that you want to implement.

Speaker 2:

so I would 100 advice to get a valuation first. Know your funding position, because that's the most important thing. If you know what your funding position is, then you can walk backwards from there saying, okay, perfect, I need X amount of dollars to buy this property and this is how much money I will have left in my offset account. This is what I need for stamp duty, etc. So working backwards.

Speaker 1:

What do you mean by funding position?

Speaker 2:

Okay, you need to um a lot of jargon. So if you're buying a property, uh, you need to know how much the costs are associated with the next property you're purchasing, even yourself. So let's use that one million dollar property as an example again. Yeah, if you're going to get 80 of that property out and it's completely paid off, you have eight hundred thousand dollars that you could use for that next property, correct? Yeah, now that your funding position for that property there in your next purchase eight hundred thousand dollars, now the next property, let's just say, for example, is a million dollars as well and you need to put 80 down plus, damn Judy, you have enough for the 80, which is the eight hundred thousand dollars, correct. And then you need cost for associated stamp duty, solicitor costs, if there's any other additional costs, pest and building report. So you need to ensure that your funding position is correct so then your next purchase can be seamless.

Speaker 2:

So you know, when you hear a lot of those bad news stories where oh, my goodness, my property took was so hard to settle or this was such a daunting experience, it's just because they didn't get the position, their funding position, right from the get-go.

Speaker 2:

So you need to understand all the fees and charges associated with the actual purchase. It's not just your um deposit and that's it go to the bank. There's external costs like. You need to understand all the fees and charges associated with the actual purchase. It's not just your deposit and that's it go to the bank. There's external costs Like you want to make sure you know if there's a valuation fee, if there is maybe a compliance fee for a certain property you're purchasing, if you need to register it, whatever it may be. So understand your funding position, so all the costs associated with it. So you're going to get no kind of um kind of star shooting at you saying, oh my goodness, I've got to pay another four, five, ten grand, I'm stuck. One day before settlement they start asking your friends or your family, your mom and dad, I need more money, that's. That could make the whole task a bit more daunting.

Speaker 1:

That makes sense have you seen that happen where people haven't realized I guess they need stamp duty costs out of pocket, in cash or you know whatever other fees they might need? Have you seen that firsthand?

Speaker 2:

Yeah, like when I first got into this journey. So when I just got into the finance world, when I first started, people just thought that it was just a deposit, that's all you needed, and I was trying to understand. Everyone was sometimes a bit frustrated with their buying process, and that's when prices were quite low. Rates were quite good as well. I saw every second client didn't know that there was more cost to it. They would get to pay the solicitor. The solicitor will sometimes hold something down or they didn't go to the bank and send the right check over or transfer the right money.

Speaker 2:

So it's daunting, 100%. I've seen it happen all the time. Now, working backwards, I've kind of found the right support network and brokers who know it from the get-go. So, yeah, they may take an hour extra paper because working, but guess what? Your whole um process will be so seamless that you want to go back again, you want to give it a go again, you want to invest again. So I guess, yeah, I use every nearly every second client third client used to have that daunting experience. I'm sure if you ask any of our friends and family or on social bubble, how was your homebuyer journey been, how has the loan process been, you may get a 50% satisfaction rate, saying oh yeah, it was scary. Oh yeah, I had to go through this. I never knew I had to do this, so I guess the right people can send you a long way are there any other?

Speaker 1:

any other considerations um people should think about before taking equity out of their property?

Speaker 2:

no, I would say just get your strategy right, like, yeah, you have money, it's as good as cash, you can have fun with the money. Just make sure you know what you want to do with the money so don't just go to the your banker broker saying, yeah, give me all the money out as I can. You can put yourself down a financial spiral downwards. Just kind of understand. What do you want to do with the money?

Speaker 2:

where do you want to, where do you want to utilize it and what are you going to buy and how you're going to make more money in return? So my like, I like that. So my biggest thing is, yeah, debt is a good thing. People may say the opposite, but if you have debt to buy something else and it's an asset class behind that debt, there's nothing bad about it. I'm not saying credit cards and even certain car loans. They're bad debt because depreciating assets are no asset behind it. So that's debt you've got to pay regardless. Yeah.

Speaker 2:

But with home property it's an asset that's always appreciating, so you can obviously have benefits in the long term. So that debt, that 800k debt that you have in that property, in 10 years time might be a 1.6 mil valuation where you can access even more equity. So you put yourself in a position to be lucky.

Speaker 1:

So yeah, that's what I would say. You kind of answered my next question, but I was going to ask what would be some smart ways that you could invest, which you obviously already discussed.

Speaker 2:

It's all about putting yourself in that situation to begin with. Yes, it's scary, but the rewards will come. Just give yourself some faith and clarity, but they'll definitely come. Just give yourself some faith and clarity, but they'll definitely come. Property has never let anyone down in Australia. I don't know if anyone's got some bad stories. I'm sure someone might have said I couldn't afford it back then. Rates were high. My position income financially was bad. Deadly stories that you hear. But every asset that person's ever bought, even four years ago, it's always gone up in value by a big margin yeah, right, I think I need to start looking at taking some equity out of my own property.

Speaker 1:

Go go, go go um, what would be, I guess, like your, your top three pieces of advice for homeowners who already own their own home and most likely have equity to take out?

Speaker 2:

Start planning. Like sit down with these strategies, property strategists, your financial planners. Like start sitting down with them and plan. You may be in a good position now where your property is worth 1.2 mil plus. You may have.

Speaker 2:

You may be sitting at a 50% debt ratio, so you have not much of a mortgage owing. Don't be scared to pull that trigger and get and take that debt out to get some more debt At the end of the pension may not be around forever. I know we probably will not be getting the pension when it's our turn, so just start using your equity position to buy something any property you can get your hands on it.

Speaker 2:

Just make sure the structures and all that is correct and start pushing. Don't be scared to take that plunge. If you're scared now, you're always going to be scared and you're going to regret yourself in five years time saying I wish I just made that little plunge. So if you feel like you're scared, it's the right feeling to have. Just don't be afraid. Keep going along the path. Keep doing your research. Talk to someone. Don't worry about the bad news stories. Understand the risks associated with it. Talk to your bank. See what the bank has to offer and have to say Speak to a financial planner, to a strategist, and then you'll get your answer from there.

Speaker 1:

Yeah, great, and I think on that as well. By reinvesting that money, if they choose to invest in property, they could be investing in an area that has much better capital growth than where they currently live.

Speaker 1:

You know a lot of suburbs in Sydney, for example, might have capital growth of around 5% 6% somewhere around there, if you're doing okay. There's suburbs in sunshine coast in queensland that I think in the last 12 months from the recent data, have gone up like 13 14. So if you're taking the money out of your property here in sydney that's still going to keep appreciating at five percent, six percent, um, and reinvesting that somewhere else, that's going to appreciate at 12, 13, 14.

Speaker 2:

You're gonna then build more equity to do do the same again and I think that's where I'm saying that, like you, you've got that, you've understood that. So if you're speaking to your partner about debt, you can kind of say, like there is good ways of having debt, like you can make money off this. I guess people um, we don't get that learning from school, or no one teaches us that. It's all these things online youtube channels that are saying that you need to buy here, your property's going to double in one year's time, two years time, like, let's be, let's be real. You want a safe, slow investment. You don't want to make money quick. It makes money quick.

Speaker 2:

There could be some downsides to it yeah if you can buy something that's again like you said. You said 10% to 15% growing year on year in a growth suburb, growth corridor. Why wouldn't you have that opportunity? Sydney you're going to get some suburbs going from 4% to 8%, which is still great, don't get me wrong. The median average value is about $1 million In Brisbane. If you can buy a property for, say, $700k and it's growing by double digits, 10% year on year, guess what? In two years time you're making 140k yeah it's pretty.

Speaker 2:

It's pretty cool. Yeah, in five years time you're gonna more than double that, so just don't over complicate it. Yeah, you're right, stick to the data where, the year on year, you're getting that good return yeah, and then put your money into that you're not making a wrong decision. If you have um an area where there's a train station, people living there, they're developing is so. Schools, communities are growing and it's they're established yeah, where's your money going wrong? Like people always don't live there, people who need to rent in that area as investor.

Speaker 2:

Make that plunge. And don't forget owner occupies, first home buyers. If they're buying in a suburb to live in and you're an investor buying in that suburb, you have the best of both worlds if you can invest in an owner occupied community.

Speaker 1:

I guess that's a little golden ticket that's the other little tip and trick yeah, is there a owner-occupied community that you've come across recently that you're kind of keeping an eye on?

Speaker 2:

um or multiple there's multiple, I guess the one that again I'm praying to the same in everyone in the office is I do enjoy the morton bay region in um up in brzy, especially the whole Narang Bar. Burbank Gallery, Burbank Gallery, East Morayfield, Caboolture. Yeah. I think there was stigma around the people there, the flooding, all that kind of stuff. I guess now think about it. Developers will not get approval to build anywhere where there's a flooding zone or it's a bad environment. Yeah.

Speaker 2:

So take that little risk away. There's growth there. Hospital's gonna hold, redevelopment they have, they're doing direct train lines all around there. They're doing all this um all these, all these new jobs, big commercial facilities, it's all happening rezoning's happening yeah, that's my go-to at the moment. Everyone who's bought there less than three months. I've made some kind of money, so it's working for me and my clients. I'm not going to go away from it anytime soon yeah so I keep riding that wave until something happens.

Speaker 1:

So the next one comes up yeah, have you got a client example on that point then?

Speaker 2:

we had, um, I won't say the name, but a client who's invested with us multiple times. The second property was a dual occupancy property, so it's like a duplex. It was like a standard home, um, three bedrooms on one side, two bedrooms on the other side. It could be four, one depending on what the configuration is. They bought in january january this year, so was that eight months ago or about 800k kombucha, about 400 square meters, around a bit more maybe.

Speaker 2:

The property fast forward eight months later is now worth one million dollars like 200k in eight months fantastic. Is now worth $1 million Like $200,000 in eight months Fantastic. Yeah, $1,200 a week in rental return Great, can't complain. So that's just one good news story. So I know if that's happened to us eight months ago. The wave is still going. There's not just bubbles going to burst. When they say bubbles going to burst, I think what they're trying to say is, if I go from 10% growth a year to maybe 4% growth a year, but guess what, if you average it out over the next 10 years, you're going to be above that 6, 6.5% growth annually anyway.

Speaker 1:

So you're still not going backwards, yeah.

Speaker 2:

It's just trying to scare us. The bubble's going to burst Like your property's going to go down in value. No, it's not yeah.

Speaker 1:

It's a big thing that we've looked at here with the team multiple times. You know, if you look at the, the graph over time from like the 60s, 70s till now, even when you know the gfc and um covid happened and whatnot you look at the dip that happened and it's, you know, this big compared to the growth of the graph. That's this big. But people don't look at that at the time. They're just saying. But property went down, it crashed.

Speaker 2:

you know it's not the stock market, I think I remember I think it was 2017, 2018, when I was heavily looking to property, everyone was saying property is going down, like it's going down 25, 10, 15 grand. I'm like, okay, I was looking at the sold out and I had a house the year before sold for 1.5 million, now sold for 985. I'm like, well, maybe prices are going down. Um, I bought in that market, so I was lucky um some properties with irregular land blocks, because before that was just a big boom kind of went down a little bit. I guess happened the year after yeah everything just went up again.

Speaker 2:

So if they're ever telling you that the bubble's gonna burst, all it means that growth rates will decrease slightly. But year on year, on year over, use historic data. Every 10 years, they say you should be calculating your risk. That's the answers, the proof's in the pudding. Every 10 years you're going to get a better result than one year or one year in 20, if that makes sense.

Speaker 1:

Yeah, definitely. Do you have any final advice for listeners who own a property, maybe, and taking out equity?

Speaker 2:

Get up and go. You need to do something. Don't let the market um, let the market swallow you up. What I mean by that? Don't wait for it to be too late. So everyone says that I wish I bought this earlier. I wish I did this for once.

Speaker 2:

If you are listening to this, just put out your phone now, start researching. Say just google, um, kabocha growth last four months. Click on your first two links. Have a look at it. You're going to get positive results. Yeah, if it's like that on your first two or three links, imagine what more you can actually unpack when you do a deep dive into it. So don't kind of get worried or scared or anything like that. Just start, start it. Go get a valuation, see what your property value is, see what your funding or debt position actually is now and just run with it. Have fun. It's, it is a fun. We've got to get away that stigma that debt is bad. Property investing is bad. You can't have multiple properties. You should be in that top 10% class in Australia where they have more than two properties. So push towards that. It's not scary if you have the right support system around you.

Speaker 1:

Yeah, for sure. I think the advice that we gave first home buyers on one of our recent podcasts was start saving, but in this instance we're going to be saying start planning.

Speaker 2:

Get up and go, go go.

Speaker 1:

Yeah, ready set go. Yeah, definitely All right. Well, it was good to have a quick Q&A with you. Is there anything else that your clients are asking at the moment or that you're seeing a bit of a pattern in the market?

Speaker 2:

I guess just finance. I guess finance is your biggest burden right now. Um, you can buy anywhere if you want to buy anywhere, if you just get your financial position right, and I guess it could start from the valuation. I guess it's a smart way if you have property now, start from the valuation. If you don't have property right now and you have savings, start from your funding position. Position sorry see what your cost associated to a purchase is. Yeah, and speak to your strategist or your planner. Let them help you out there. Um, that'll be step one.

Speaker 1:

Yeah yeah, perfect, and I mean we don't normally plug liberty but um, liberty can help clients with that. We've got our finance arm of the business, we've got our investment arm of the business, um, and, yeah, that's what we do best is is help clients find the option for them, and you don't have to go, go out there and just say that I need to go for liberty.

Speaker 2:

Only like, speak to the guys first. They may give you a strategic plan where you may not even need to go anywhere more. It's just that having that first advice may show you a lot of value and we've had clients who got that advice, went back six months, came back six months later. That could be an hour conversation can kind of set you forward two or three years if you just make that first commitment yeah, even if they're not quite ready to buy it right now.

Speaker 1:

It's starting that conversation. Start yourself off on the right foot and and Thanks.

Speaker 2:

Laura.

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Daniel Chadrawy

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Lara Osborn

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