One of the reasons Australians has such a love affair with property investing has got to be the fact that property values keep increasing year after year.
Many people have realised that you can refinance and use that equity in their home to go out and buy another property that also increases over time.
The idea is that you are leveraging the one to get another property that will also increase, and in time you can use the equity from that second property to buy a third…
…Yet, most “property investors” only have one investment property. Why is that?
There’s probably a bunch of reasons why this is the ceiling for most people who have a go at investing.
One reason is that since most people use negative gearing, they are effectively reducing their income that makes them less appealing to banks for additional loans.
Another is that they are basically speculating on prices in any given area increasing the amount they want. People jump into hot markets trying to ride the rise, but often the move has already happened.
It all sound good to most people when your accountant is trying to sell you on the idea, but the reality is far from glamorous.
The big question is this: Is there a better way to use the equity you’ve gained in your home to improve your wealth and lifestyle?
Answer: Yes – Yes there is!
Well, my vote goes to commercial property.
Commercial property allowed me to retire over 16 years ago (at age 37) and never have to work another day in my life.
Commercial property, the way I’ve been doing it, has provided me with a constant supply of passive income, which grows every year, along with giving me the massive potential to grow my equity position as well.
Of course, I’m biassed in many ways because commercial has changed my life. But if you have equity in your home doesn’t it make more sense to actually get a tangible, measurable return on that money?
Yes, that same equity that you could use to buy another negatively geared property could also be used to buy a commercial property that returns 8% to 12%.
If you have 200K in your property… and you get a bank to lend you another 600k (yes for properties under a million it is possible to get up to 80% finance – I’m just being conservative in this example) then you’ve got 800k to buy a commercial property.
Now, I’ve been teaching my students to negotiate hard and know their numbers well, so even if we go conservative at 8%, that’s an income of around $64,000.
*(please be aware that these numbers are just very rough ballparks and not based on a real example – just guesswork based on 33 years of experience)*
Of course, you have to remember now that you’ve got two loans happening now…
1- You’ve refinanced your home so your mortgage repayments are going to be bigger.
2- You’ve got another loan from a lender for the 600k you used to buy the commercial property
You need to pay back both of those loans now. Typically on a $64,000 income from a commercial property you may have to pay back around 30-35k in loan repayments – this factors in both loans.
You’ve effectively used the equity in your home to give yourself a 20k to 25k pay rise.
The cool thing here is that while other investors are taking a hit to their income on the promise of some lousy tax break, you’ve just locked in a great little income.
So what about the equity. Most media outlets claim that capital growth is much bigger in residential than in commercial, and, for the most part, that’s true. If you just let a house and a commercial property sit there and do nothing, the house will increase in value faster.
However, in both cases that’s still gambling. That’s still waiting for the market to define your growth.
A better solution is to actively grow your equity. In both cases, you can do things like renovate or add to the building that increases the value, and many people do this.
The difference, however, is that in the case of the home it comes down to a valuation of what the newly refurbished home will now get on the open market.
But commercial, you’ve got to think a little differently. Value is determined primarily by the lease. If you buy a large shop for instance in a high st with a large office space, upstairs you can look at it as one large space – a showroom with office space. You could make it two or three smaller shops, you could break up the office space into smaller offices, or you could turn upstairs into apartments,
Each of these options will change the amount of rent you can get from your building. By splitting shops, you can create more rentable doors that can increase your rent. The side effect is that you also have more leases that reduce your risk. Lessors are locked in for the life of their lease but also if they decide to leave at the end of the lease you still have income coming from the other leases to tide you over until that door is leased again.
The beauty of all of these options is that increasing your rent will increase your valuation. Increasing the number of rentable doors will increase your valuation. Locking in more and longer leases will increase your valuation.
In the end even comparing capital growth from valuations, if you choose the right property and take the right action you can increase the equity in your commercial property much faster and much higher than any residential property… you just have to know what to do and how to do it… I teach that!
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