Finance advice

Equity empires

By Vivienne Kelly
Equity empires

Using equity to invest in property isn’t just for those who already have multimillion-dollar portfolios. If you buy well, having just one investment property could be all you need to catapult you into your next few purchases. You might not have any investment properties yet, but you could be sitting on a goldmine disguised as your beloved owner-occupied home.

Equity is for everyone – it’s a tool that, provided you use it responsibly, can enable you to continue growing your portfolio, even in the absence of cash savings.

Sam Saggers, CEO of Positive Real Estate, says investors with multi-property portfolios use equity to create a domino effect with their property acquisitions.

“Let’s say we’re just starting out and we’ve got $35,000. We put that $35,000 in the bank. After a year the bank calls us and says ‘Well we’ve still got your $35,000, but things have gone really well here at the bank, so here’s another $35,000’.”

“Now that’s pretty unbelievable – but if it were to happen you’d put all your money in the bank. Of course the banks don’t do that, but property does and your job as a property investor is to choose an asset where you’re going to put your deposit into the deal and after a period of time – usually one, two or three years – you recycle your deposit, in this case the $35,000, in the form of equity.

“You’re looking to put your cash into a deal and pull it out. The number one reason why a lot of property investors become successful is they choose properties where they can grow equity. And by growing that equity of course they create a nest egg to invest in other assets. Equity is the key to being a great property investor.”

Mr Saggers explains that a lot of Australians over the past few decades have been fortunate enough to create accidental equity, but if investors know how to use it properly, they can surge ahead of the pack and create a self-sustaining portfolio.

“More people create equity through luck. They buy a property – they don’t know where they’re buying, they just buy it because they like it. They then hold onto it for long enough that it creates equity.

“Unfortunately in Australia today, there’s a lack of financial responsibility and more people spend their equity on the wrong things – they buy a car, they go on a holiday. They don’t invest it wisely.

“So you need to care for your equity, because it’s actually your nest egg for the future. If you can work out how to move it around the markets, and make it work for you, I can tell you, equity will become your best friend.”

Structured for success

If you want to make the most of equity in your portfolio, the first thing you need to do is structure your finances correctly, director of Right Property Group Victor Kumar says.

He says a lot of investors get sucked into the idea of using their principal place of residence to invest in property, but can get themselves into trouble when cross-collateralisation goes wrong.

The number one reason why a lot of property investors become successful is they choose properties where they can grow equity

“If you’re just aiming to build a one- or two-property portfolio, cross-collateralisation isn’t too much of an issue,” he explains. “But if you are trying to build a multi-property portfolio and you have all the properties tied to each other, then you become really dependent on every single property in your portfolio stacking up when you’re coming back to sell down or top up your loans.”

Mr Kumar warns that cross-collateralisation often doesn’t work in investors’ favour when they’re trying to access equity to buy more properties. They may have one property which has grown in value by $100,000 and another which has decreased in value. If all the properties are tied together, investors may not be able to access the equity they’ve accumulated in their better-performing properties.

Elaine Chase, property mentor at Positive Real Estate, says investors will also be able to access their accumulating equity more easily if they spread their loans between different lenders.

“You want to have your portfolio with different banks as much as you possibly can,” she says. “If you give one bank the power over your portfolio it can stop you from releasing equity.”

Lisa Montgomery, finance specialist and consumer advocate at Resi, says having your property debt tied together in one facility can also make it difficult to measure the different properties’ performance.

“If you’re building a multi-property portfolio, you want to understand how your properties are performing. If you have all your properties under one loan, it’s very difficult to identify which properties are performing and which ones are not performing.

“For that I do suggest a more lineal or more individual strategy or structure which means that you’re going to have a loan per investment property. Now a lot of people think ‘Well, that’s a lot more administration’, but I think over time it’s going to give you more information and more power than it is going to give you administration.”

In addition, Ms Montgomery says if you have a non-performing property asset, it’s much harder to unwind and sell it off because it’s tied to your other property loans.

Mr Kumar says instead of cross-collateralising loans, investors should set up separate facilities and aim to always transfer their debt back onto their investment properties, which is more tax effective than having a highly leveraged principal place of residence.

He says the best way to avoid over-leveraging and putting your home, or one of your other investment properties, at risk is to ensure you’re only tapping into a finite amount of funds.

“You need to start off with finite capital and not get carried away,” he says. “So you start off by tapping into $100,000 equity in your home and you use that to fund your deposit and your closing costs for multiple property purchases. Once you’ve exhausted that, the ideal way to proceed is actually to go and tap into the new equity of the investment properties you’ve acquired. You then pour that money back into your owner-occupied property, then tap into it again.

“That way you’re not over-leveraging. You’re giving the capital amount that you’ve committed to your investment business and keeping it at a finite level. That way, you won’t go into negative equity.”

Mastering your finances

Getting your finances right is actually the unsung hero of effectively using equity, says Ms Montgomery.

“It’s interesting. People don’t think as positively about equity as they should,” she says. “It really is the gateway to property investment because it opens up opportunities. The more equity you’ve got in your own property, the more opportunity you have to invest into property and also other asset classes if you want to.”

Ms Montgomery says investors can wait around for capital growth to increase their equity, or they can take matters into their own hands.

“You’re going to build a multi-property portfolio a lot faster if you increase your repayments on your principal place of residence and pay that loan down. It can be quite surprising how quickly you can get that equity through pre-payment. Even just $10 a week will make a huge difference.”

In addition, Ms Montgomery says investors will build up equity much more quickly if they improve their overall financial wellbeing.

She says a mortgage is the lowest interest and most flexible credit facility available, and if investors are hampered by other debts, they should consolidate these payments into their mortgage.

“The mortgage interest rate is so much lower than most other debt facilities, so you’re actually going to create that equity a lot more quickly by consolidating your loans into your mortgage.”

Ms Montgomery says it’s also important to understand the tax implications of your debt structures and ensure your portfolio is as tax efficient as possible.

She explains that the more you know about the financial implications and growth opportunities associated with accessing equity, the more quickly you’ll be able to grow your portfolio.

“You can’t undervalue equity in property. It’s a funny thing. Some people find they really don’t want to borrow on their existing place of residence. They don’t feel comfortable borrowing money and using that as security for something else – whether it be for consolidation or for buying another performing asset like property.

“So it’s really about moving through that mentally because the equity in your property is really the tool to help you create wealth because it allows you to get that next property and the next one. Equity really is the key to good property development.”

Address  Purchased Property type Purchase price Estimated current value Rent Rental yield
Cairnlea, Melbourne 2005 5 bed, 4 bath, house $450,000 $720,000 $500p/w 5.77%
Kanagroo Flat, Bendigo 2009 2 bed, 1 bath, house $190,000 $240,000 $250p/w 6.80%
Mildura, Melbourne 2010 2 bed, 1 bath, unit $125,000 $135,000 $300p/w 12.48%
Mildura, Melbourne 2010 2 bed, 1 bath, unit $125,000 $135,000 $300p/w 12.48%
Mildura, Melbourne 2010 2 bed, 1 bath, unit $125,000 $135,000 $300p/w 12.48%
Mildura, Melbourne 2010 2 bed, 1 bath, unit $125,000 $135,000 $300p/w 12.48%
Golden Square, Bendigo 2011 3 bed, 1 bath, house $300,000 $330,000 $330p/w 5.70%
St Kilda, Melbourne 2014 1 bed, 1 bath, apartment $435,000 $460,000 $400p/w 4.78%

Sze Chuah

Address  Purchased Property type Purchase price Estimated current value Rent Rental yield
West Ryde, NSW May-09 3 bed, 2 bath townhouse $528,000 $780,000 $0 0.00%
CarramarCarramar, WA Carramar, NSW, NSW Jul-10 2 bed, 1 bath unit $182,600 $300,000 $300 8.54%
North Parramatta, NSW Jun-10 2 bed, 1 bath unit $250,000 $370,000 $370 7.70%
 Mount Druitt, NSW Jul-10 2 bed, 1 bath unit $165,000 $270,000 $280 8.82%
 Moree, NSW Aug-10 3 bed, 1 bath house $52,700 $100,000 $170 16.77%
 Springdale Heights, NSW Sep-10 3 bed, 1 bath house $110,000 $170,000 $205 9.69%
 Whalan, NSW Sep-10 3 bed, 1 bath house $190,000 $350,000 $320 8.76%
 Orange, NSW Nov-10 2 bed, 1 bath unit $87,000 $120,000 $170 10.16%
 South Kempsey , NSW Nov-10 2 bed, 1 bath villa $85,625 $120,000 $220 13.36%
 West Tamworth, NSW Apr-11 3 bed, 1 bath house $110,000 $130,000 $195 9.22%
 Leumeah, NSW Aug-11 2 bed, 1 bath townhouse $214,500 $300,000 $305 7.39%
 Eagle Vale, NSW Oct-11 3 bed, 1 bath house $253,000 $380,000 $350 7.19%
 Mount Druitt, NSW Nov-11 2 bed, 1 bath unit $179,500 $280,000 $275 7.97%
 Mount Druitt, NSW Nov-11 2 bed, 1 bath unit $166,792 $270,000 $280 8.73%
 Penrith, NSW Nov-11 3 bed, 1 bath house $235,000 $380,000 $345 7.63%
 Ruse, NSW Jun-12 3 bed, 2 bath house $265,000 $420,000 $410 8.05%
 Woodridge, QLD Dec-12 2 bed, 1 bath villa $133,000 $180,000 $230 8.99%
 Rosehill, NSW Dec-12 2 bed, 1 bath unit $272,500 $350,000 $345 6.58%
 Mount Coolum, QLD Jan-13 3 bed, 2 bath unit $370,000 $450,000 $485 6.82%
 Woree, QLD Jun-13 2 bed, 1 bath unit $93,000 $120,000 $205 11.46%
 Port Macquarie, NSW Jun-13 3 bed, 2 bath unit $262,000 $300,000 $350 6.95%

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Property investors are now able to identify and bid on auctions remotely using a new live-streaming functionality launched by Gavl.

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Called “Request an Auction”, the new functionality enables users to watch and bid on any Sydney or Melbourne auction remotely.

Through Gavl, prospective buyers are now able to register to bid on their preferred auction. The platform will obtain permission from the listing agent and confirm within 48 hours.

Vendors can also request to have their auctions broadcast to a larger buyer audience.

Co-founder Joel Smith said that auctions streamed on Gavl attract 47 per cent more viewers than traditional ones.

He said that Request an Auction will be valuable for remote buyers.

“Buyers are able to have Gavl attend any auction they nominate, so they will never have to miss out on an opportunity due to logistical complications in physically attending the auction.

“Vendors, too, have the opportunity to directly book an auction with us, so they can open up their event to buyers all around the world. With more potential buyers, they’re giving their property the chance to receive more bids and maximise their sales result.”

Mr Smith said that prior to the Request an Auction app, buyers were limited to what they could achieve through the Gavl technology.

Gavl is a live-streaming and bidding platform for real estate auctions.

Mr Smith said that it has streamed more than 6,000 auctions, which have achieved 3.5 million views from 50 countries.

Gavl’s Request an Auction function is currently being offered in Melbourne and Sydney only.

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Boost for investors as app sets up off-site bidding
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Having to split her time between Hong Kong and her original base of Sydney has not slowed Julia Tita’s goal of building a high-performance Australian property portfolio. Instead the resulting alterations to her strategy have positively impacted her investing success.

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Having recently purchased her 6th property, Julia joins host Tim Neary to discuss her journey, share her ups and downs over the years, and reveal her thoughts on why some properties are better than others.

Julia also explains why she no longer makes a move without the help of a buyer’s agent, why working with a strong team of specialists is extremely important and discloses her long-term property ambitions.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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Bondi

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How a move to Hong Kong impacted Julia’s Australian property goals
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  ["title"]=>
  string(88) "‘Common’ referrer practice of being paid on both sides of the fence coming to an end"
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The practice of property investment firms sharing undisclosed kickbacks among the supply chain involved in development sales will be outlawed in NSW on 1 July this year under the Real Estate Reform being handed down by regulators in NSW.

" ["fulltext"]=> string(2238) "

Property commentator and valuer, Suburbanite’s Anna Porter, said the reform will address conflicts of interest.

She said they arise when a mortgage broker, accountant or financial planner receives part of the commission from the property firm, who receive their fees from the developer or seller.

“This puts the broker into a position by which they are being paid on both sides of the fence,” she said.

“Until now this has been a grey area and there was nothing stopping this practice.” 

Ms Porter said this has been a common practice in the industry.

"Some well-known mortgage broking firms openly admit to receiving $5,000–$10,000 per referral in their pocket.”

She also said this process has been going on for decades.

"Property investment firms commonly pass some of their commission on to the mortgage broker, accountant or financial planner as a reward to them for passing on the referral. This means that many brokers or financial service providers are making significant amounts of money just to refer on to a property firm, often totalling hundreds of thousands of dollars a year," Anna Porter said.

Ms Porter said the Property, Stock and Business Agents Amendment (Property Industry Reform) Bill 2017 will be in force from July this year, and will prohibit this practice unless the broker or referring partner also holds a real estate industry license.

"Under the new laws, if the broker takes a referral fee from the property firm, they will have to be a licensed real estate agent and also hold a corporation’s license,” she said. 

“Subsequently, every transaction that they receive a referral fee from, they will be putting their license up against the transaction and taking full liability for the conduct, practices and outcome of that transaction, even if they have little to do with the transaction; they are a party to it financially and therefore take as much risk as everyone else in the transaction.”

Mr Porter said where a referrer holds a real estate license, and receives a part of the sale commission, they may find themselves in breach of the ethical requirements under the act.

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‘Common’ referrer practice of being paid on both sides of the fence coming to an end

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