As a property investor, equity is the key to your long term success. It reflects the increasing value of your portfolio and will make up a significant proportion of your returns. It can also help fund further growth of your portfolio, either through renovating your existing properties or buying new ones.
But exactly how do you use your existing equity to boost your portfolio growth? And how do you make sure you are getting the best possible return from this reinvestment?
How is equity calculated?
Put simply, equity is the share of a property’s value that you own. It is essentially the difference between the market value of a property and the amount owing on it. For example, if a property is valued at $650,000 and you still owe $400,000 on it, your equity is $250,000.
In a completely flat market, if you make principal and interest repayments, your equity should increase over time. This is because you are slowly chipping away at the amount owing and steadily increasing your share in the property.
Your equity will also increase when the market is strong, and the value of your property grows. Similarly, you can attempt to actively increase your equity by updating, renovating, or extending a property.
Once you have built additional equity in a property, you can leverage it to fund further growth of your investments. But first you need to extract this value from your property. There are a few ways to do this, including:
It is important to note here that the only way to access all your equity is to sell the property. This is because most mortgage providers will only allow a loan-to-mortgage ratio of 80% unless you have mortgage insurance. This means your usable equity will usually be notably less than your total equity.
To make this a little clearer, let’s revisit our previous example. An 80% loan on a property valued at $650,000 would be $520,000. When you take away the existing mortgage of $400,000, this leaves $120,000 in usable equity.
You should also remember that borrowing against the equity in a property will increase the amount you owe on it. This means your regular repayments will increase, so you need to be sure you can afford the additional ongoing cost.
Tips on getting the most from your equity
There are a few simple things we recommend you do to maximise the returns you get from reinvesting your equity. This includes:
Want to discuss this further?
If you would like more information on making the most of your equity, call Search Party Property. As property investment specialists, we understand the critical role equity plays and the many ways it can be used. We also offer complementary portfolio accelerator consultation sessions which are designed to help you grow your investments quickly.