Here’s another illustration how property investment can work for you. Assuming a young couple bought a property in Brisbane worth $250,000. They used $50,000 of their savings and loaned $200,000 from the bank to buy the 3-bedroom home. Having lived in their home for the past 10 years, the worth of their property has doubled to $500,000. The couple diligently saved and was able to reduce the balance of their home from $200,000 to $100,000. In effect, the equity of their home is now $400,000. Looking back, we will find that the couple’s equity of $50,000 when they first purchased the property has grown to $400,000 ten years later.
While this looks like an excellent result, the truth is, they just have the same house they purchased 10 years ago. It isn’t enough to put more food on the table or clothes on their back. But let’s take a look at how this equity can help them build more wealth by looking into the future.
Ten years after another property cycle has come and gone. Like other well-positioned properties, their house would be now worth close to $1million. The couple still worked hard to pay off their loan at the bank until finally the loan becomes fully paid. Now they have a property they can call their own, debt-free. Assuming an eight per cent increase in capital per annum, the couple would have their property worth a million dollars, two million in the next ten years and so on. If they made renovations, altered or improved their property, it will be worth more in equity.
Many Australians find themselves in this situation when they retire – they have a home to their name and some superannuation. Now assuming the home is nothing flash and grand, just the typical home with an average value, selling their home and downsizing could mean settling for a significantly inferior accommodation.
Many had the mistaken belief that every Australian’s dream, or every person’s dream, is ultimately own their own home. However, this idea has outlived its usefulness.
But that doesn’t mean you cannot and will not have your own home. There’s a smart alternative.
Going back to the present, instead of just paying off the equity, the couple could use this resource as a means to unlock an asset to financially secure their future. They could refinance their loan and use this money to buy themselves some property investment.
Since their purchased property is now worth $500,000 and the bank can give them at most 80% of this value, they can still get $400,000 worth of loan. Since they still have an outstanding balance of $100,000 from their previous loan, they are now entitled to $300,000 worth of money. Anybody can use this amount to go places, shop in high-label stores or put up a business. If the couple uses the money sensibly, this can become their best weapon towards financial freedom. And the best and recommended thing to do with this money is to use it as deposit to secure an investment property. The property’s value is bound to escalate in the next few years, providing them more assets to their property portfolio.
Using a line of credit, the couple could now purchase a property worth $500,000, $300,000 of which came from the re-loan, while the rest can be managed by a finance broker. If you come to think of it, the couple now owns $1million worth of property with values that will surely increase for the years to come. For the first year, the couple will get as much as $80,000 capital gain, and this amount will inevitably increase year after year.
The great thing is that this increase in value of their properties represents capital gain and is not subjected to any taxation unless they decide to sell their property. In five years, the worth of their property becomes $1.5 million, with a capital gain of $875,000. The couple became millionaires in a matter of fifteen years, with only $50,000 out of their pockets. By investing in residential real estate, the couple has achieved, in five years, what would have taken closer to ten years if they just had continued paying off their home without a property investment.
Another thing to remember to take advantage of property investment is to wait for the previously purchased properties to increase in value for doing another purchase. While the couple in this example is capable of buying a new property from their line of credit, as conservative investors, it would be best not to buy again until they have enough cash to pay for the deposit, acquisition costs and have enough available in their line of credit for further five years of interest shortfall.
As properties increase in value over time, it is likely that they will need a little more money when they are ready for their next buy. With this cycle going on, throwing in a few ideas to save and make more money, financing from banks or a broker, and the couple is likely to amass a few more properties to create their multi-million dollar portfolio. With the guaranteed appreciation value of properties in the market, an ordinary Joe can enjoy with little investment and a good credit line can enjoy his passive income from residential property investments. This couple could be you, and you could be a millionaire in matter of a few years from your property investments.
Again, you set up a loan facility against existing properties so you can make another purchase. You have enough money to pay for the 20% deposit, purchase costs and enough money for a “sinking fund” to cover the interest shortfall for the next five years. Then you just wait for appreciation in value of the property or rental income to come in and you will enjoy neutral, or at best positive cash flow.
“How will they pay the interest?” “What about the cash flow shortfall?” you ask.
The great thing about their investment property is that paying the interest on this loan will be much easier that paying the interest on their home loan because the tenant will pay a large portion of its rent. They will also have the benefits of tax savings.
It will take wisdom on finance, property management and some market research. But mostly, you just have to consider taking risks, and risk in property investment is good. Why? Because property almost never goes down, it may stay the same, shoot significantly higher in some years, but history says, there’s nowhere to go but up.
To get in touch with a Financial Specialist at Gordon Wealth, click here, or call us on 1300 05 05 88.
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