Equity is a concept that is typically top of mind for most property investors. A smart investor knows that equity can play a key role in creating passive cash flow that increases over time, allowing us to eventually work less and ultimately do more of what we love.
But in order to be able to use our available equity to create some passive income, there are a few fundamental steps property investors need to take from the start of their investment journey.
STEP 1: QUALITY IS KING
Property investors want the acquisition period, that is the time that we are buying properties and structuring our portfolios, to be as quick as possible. The faster that we can buy the required properties, the sooner we can start generating enough passive cash flow to reach our goals.
Just because we want our acquisition period to be fast, it doesn't give you the green light to buy any and every property that pops up. Quality is king when buying real estate for the long term.
We're not just talking about the quality of the physical building. It’s also the quality of the location, and quality tenants that we're aiming to attract and rely on for regular rent increases.
Fundamentally, properties will increase in value based on the quality of:
what you buy
where you buy
who you rent to
STEP 2: GET THE RIGHT FINANCE STRUCTURE
One of the best feelings as an investor is when you watch the values of your properties grow, and with that the amount of equity you have.
However, if the loans were structured in a way that doesn't allow you to access, or can’t afford to access that equity, it’s a futile struggle.
Equity can only benefit you, in terms of cash flow, if you can gain access to it.
If you don’t understand your loan structure and finances, look for help from experts and possibly get some coaching to ensure you’re starting your property investment journey right from the get-go.
STEP 3: BUY WELL AND DON’T SELL
If you think the only way to unlock the equity in your properties is by selling, then you’re both wrong and also about to lose a lot of your value to the government in taxes and the selling agent in commissions. Whatever is left over will go into your bank account where you’ll earn next to no interest. Selling to access equity to fund your lifestyle isn't the right decision in most cases.
A smart property investor knows that they need to hang on to their properties for the long term (over 15 years) to allow that property to go through normal market cycles and reach its full potential. To help boost the value over the 15 years you can always renovate which will further increase both your cash flow and appeal to quality tenants.
STEP 4: KNOW YOUR NUMBERS
Property is all about the numbers. right from the start, we have to map out what our goals are (typically retirement) at the end and reverse engineer. From that, we calculate how many properties that lifestyle will require and how much rent will need to be coming in to fund that lifestyle.
Equity is very much the same. The value of your property portfolio has to be high enough for your equity to be able to act as a cash flow buffer. If our equity pool is too low then it won't work.
Also, if you're taking too much equity value (more than 2 per cent) out of your properties, then you can be left in a vulnerable position.
You should seek some expert coaching and advice from professionals who know their numbers and can help you make equity act as cash flow.
GET STARTED FOR FREE
Talk to us at Lush Property about where to begin. Luke has decades of experience on how to maximise your position for the long term. You can book a free 45min consultation by clicking here
Luke Jorgensen - Lush Property
Tags - Property Investment; Property Development; Renovation; Valuation; Valuer; First Home Buyer; Buyers Agent; Buyers Advocacy