Your lazy equity could be making you $50,000 a year – safely!

30-Apr-2014

Opportunities to tap into the investment property market rarely get better than now for existing property owners. But failure to use your lazy equity could cost you a small fortune.

As Sydney house prices go through the roof, many property owners will be quietly celebrating the growing value of their investment. You may be one of them. Yet if you don’t take the next important step, it could cost you hundreds of thousands of dollars, or more, in the long term.

What’s the issue? It’s all about lazy equity – there is a huge amount of underused equity and borrowing capacity in the community. Consider the fact that sections of the Sydney property market, including almost all northern beaches properties, have recorded a rise in value of 15 per cent to 25 per cent in the past 12 months. For many people, that will equate to about $100,000 to $200,000 of extra equity which can be used safely and sensibly to buy another home or unit. For some people, the increase in equity could be much higher.

So why do many people baulk? In my experience, the main reason is a lack of financial literacy and education about the property market. If you attend a professionally run property investment course, it can take as little as half a day or one day to learn the fundamentals and understand the enormous opportunity that current market conditions present. I’m not talking about a get-rich sham at which the organiser is merely spruiking a new development, but a genuine course where the objective is to learn.

Some people also fear over-committing themselves financially if they buy another property. However, it can cost less than $50 per week to fund an investment property – and, with just 5 per cent capital growth, a single property worth $500,000 will grow by $500 per week. Not acting equates to about $26,000 in lost opportunity every year. That amount could potentially have been used as a deposit on another property, which could in turn have grown significantly in value over the next 10 to 20 years.

That’s not to say you should jump into the market without managing risks. Given the recent growth in value of properties, you should have enough equity not only to borrow the deposit and costs on another property, but also to get extra money to use as a buffer. You could borrow an extra $20,000 to $50,000 just in case something untoward happens.

With this buffer – and having in place landlord insurance, income protection and life insurance – you will have peace of mind. Another smart move at the moment is to lock in a fixed-rate loan. It is not hard to find a five-year, fixed-interest rate of about 5.5 per cent to 5.7 per cent, which is historically low and provides budgeting surety.

With an under-supply of properties and high yields in cities such as Brisbane, Sydney, Newcastle and Perth, it is a great time to use your equity. Educate yourself about the market and speak to an experienced advisor about the options available. Then act – and put that lazy equity to work.

This article first appeared in the April edition of Peninsula Living Magazine.

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