Finance advice
David Shih

Demystifying equity and how you can use it towards your next purchase

By David Shih

In the property investing world, equity is the magic word that everyone is chasing! But what exactly is equity, and why is it so magical?

I remember I used to wonder about these questions as I start my journey, so today let's uncover a bit about what equity is and how you can use it in your next purchase.

What is equity?

In simple real estate terms, "equity" is the additional value a property contains.

A simple example:
Current value of a property - $600,000
Loan on the property - $300,000
Equity of the property = current value minus loan - $300,000

Now, equity is usually realised in two common ways:
1. By selling down the property to obtain profit
2. By leveraging more with a lender, as line of credit (LOC)

Selling down the property is quite straight forward; the net profit you get after factoring in all costs of sale is your equity. With this approach, the equity comes in as cash form.

But if you don't want to sell down, think of it as taking the property up to a financial institution as a leverage to negotiate in order for you to lend more money from them.

This is the more common approach for investors as they do not need to sell down the asset, but is able to "extract equity" of a property and use it towards the next purchase. The "extracted equity" comes into a form commonly known as Line of Credit, or LOC.

What does LOC look like?

When you have an LOC setup you'll most likely see two lines in your bank account:
1. A loan account for the LOC established (what you owe to the bank)
2. An offset account linked to the LOC, with the same value (this is the equity you can use)

One important clarification here — LOC is a type of loan and not free cash. If you draw down the amount in your offset account, you'll be charged with repayment, so it's important to understand this concept: extracted equity via LOC is borrowed money, but it can be used as the stepping stone to expand your property portfolio.

Also, at the time of writing, most financial institutions are only willing to set up LOC up to 80 per cent of the property value. So, using the example we have above:
Current value of a property - $600,000
Loan on the property - $300,000
LOC = 80 per cent of property value minus existing loan - $180,000

Also note: because LOC is a type of a loan, banks will have to conduct their lending assessment to see if you can service the additional amount.

How can I use LOC as deposit to purchase the next investment property?

Continuing on from the example above, the $180,000 sitting in the offset account of an LOC is fund that can be used towards the next purchase in the form of a deposit. Let's say Bob has extracted an equity of $180,000 from his principal place of residence (PPOR) and now wants to purchase his first investment property, which we can call IP1.

IP1 sales price: $600,000
Loan required (assuming at 80 per cent loan-to-value ratio (LVR)): $480,000
20 per cent deposit required: $120,000
Purchase cost (stamp duty + conveyancing, etc) = roughly 5 per cent of sales price = $30,000

So in this case, instead of funding the deposit + purchase cost using his cash savings, he can fund it straight from LOC, and Bob can use his free cash for something else or towards his next purchase.

There is also an additional benefit here; since the borrowed money (LOC) is going to be used for investing purposes, it will be tax deductible.

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About the Blogger

David Shih

David Shih

David Shih is a Sydney-based investor who have built and amassed a property portfolio across NSW and QLD. David has a real passion in helping others with property investing, personal development and believes having the right mindset and optimism is absolute paramount to the success of everything in life. David is sharing all his tips, lessons and experiences in his blog which can be found at mypropertystories.wordpress.com. He is happy to talk property anytime via Facebook, Google+, Twitter (@diyshih) or via the blog.

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  ["introtext"]=>
  string(144) "

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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AREAS MENTIONED:

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How a move to Hong Kong impacted Julia’s Australian property goals
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  ["id"]=>
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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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  string(246) "

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.

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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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