For anyone who has owned real estate for any period of time, there’s a fairly good chance that their property has gone up in value.
But if you have a property that is worth more than you’ve paid for it, then you might be guilty of making this big mistake. But the good news is, it’s easy to fix.
Arguably the most powerful element of property is the ability to tap into equity that has been created. For example, if you purchased a property for $500,000 10 years ago and now that same property is worth $1 million, then you’ve seen you’re equity increase by $500,000. That’s not including the fact that you might have also paid down some of the debt and had equity in the form of a deposit when you purchased it.
However, if you are holding onto this property and the equity is just sitting there, then you are actually leaving a lot of money on the table, by way of opportunity cost.
As we know, property increases in value over time and the more property you can hold onto the better the result long term. If you have equity and you’re not using it, you are likely making a mistake in that you are not maximising what you currently have.
In the example above, you could theoretically pull out approximately 80 per cent of the equity and then use that to go and buy another property. That then gives you two properties that are growing in value over time.
While some people might be focused on paying down the debt and holding onto the property, if your goal is to build wealth, then this isn’t the most optimal strategy. You actually need to be building your portfolio. Then in time, you can still pay down the debt when you you get into the next phase of your life. But you can do that by selling down some of the properties, instead of paying it down out of your own pay cheque each month.
Even if you’re unsure about what to buy it can still be a good idea to free up the equity in your property, just so it is ready to go if an opportunity presents itself.
Some people don’t want to do this for fear of paying interest on the money when they refinance. However, you can simply put the money back into a linked offset account and you are effectively not paying anything.
Then when you find a property to purchase in the future you can put it to work. This also acts as an emergency fund of sorts as well, should something happen and you need cash fast. It’s a far better option than firesaling a property like we see some people do when times get hard.
The other advantage of using equity is that you are not paying any tax on it. Should you sell the property you would be forced to pay capital gains tax plus all the sale costs that go along with it. When you pull out equity it is not considered income.
This is another reason why property and using equity are such a powerful way to grow your wealth.
Instead of just paying down debt, keep buying properties, pull out the equity and go again. If you continue these steps you will find that your life will be very different in 10 or 20 years time.
If you are interested in getting ahead in the property market, feel free to reach out to a Henderson buyer’s agent today for more information.
