HARNESS EQUITY FROM VALUE GROWTH TO BOOST PORTFOLIO

A mate of mine called this week wanting to know how he could use his equity to buy an investment property and whether I thought that was a good idea. He purchased his property about 15 years ago and he has done a cosmetic renovation. With the surge in prices since Covid he is keen to understand how he can use this new value to his benefit. He paid about $300,000 and spend about $300,000 on the renovation. Looking at sales in the area I think its worth about $1,500,000.

Which means he now has about $900,000 in equity. I think he thought he could just use that money like cash and off-set the equity against a new property. Meaning he could just go and buy a property for $900,000 and have no repayments. Unfortunately that’s not the case. A bank will let you use 80 per cent of the equity, so in this case $720,000, as security against another property. Trying to keep him awake, while explaining to him my bush accountant version of property investment, I decided to start talking about the money.

I told him that most likely the rent would pay for most of the property and his real return will come from the value of the home increasing in price. He asked “So do people live off the rent as income?”. I told him that’s unlikely from one property. Once the debt is paid down, you can make some money, but the real cash comes from the property increasing in value and you selling it or starting this cycle again.