How to tap the equity in your home to build wealth.
Many property gurus claim that “The family home is not an asset, its a liability”.
In some cases this is true but it doesn’t need to be this way.
For most, their home represents the bulk of their wealth. And to not make the most of it, is to squander the opportunity for a sound financial future. Most homeowners pour their disposable income into improvements as their needs change but their renovation decisions tend to be coloured by emotion and lack strategy.
The harsh reality is that not all renovations add value. Many keep them chained to a mortgage without ever getting ahead enough to start building wealth for the future.
Many Australians make a promise to themselves that they will fund their own retirement.
Getting started is often the hardest step. All they need to get started is a deposit and costs on the purchase of their first investment.
For most, that can be sourced from the equity in the family home.
According to the 2016 census around 70% of Australians own a home, so have the launchpad for their property portfolio.
Yet, less than 20% own an investment property.
You can have the home of your dreams AND leverage it to build wealth but you need to be seriously committed to your financial goals and be willing to take action.
As I said, many Australians set out to fund their own retirement, most disappointed in their results (or lack of)
They do a lot of worrying, some talking but not much DOING.
I’m going to share with you some of my top tips for building and tapping into the equity in your home to build wealth.
Start with a plan.
“A goal without a plan is just a wish.”
The plan shouldn’t be set in stone. But a tool to maintain your focus on the results you want.
To motivate you to take the right actions.
You will find your plan changes as you build your skills and networks and new opportunities arise.
Bend and flex as your skills and sophistication as an investor develop.
Take a two-pronged approach.
Plan your path to build value in your home to meet your lifestyle needs as well as build equity that you can tap into.
Plan to start sewing those seeds to your property portfolio as soon as you can refinance. And safely extract enough equity in your home to purchase your first investment property.
Don’t let emotion sabotage your renovation decisions.
Take a pragmatic approach in adding value to your family home. Make sure everything you do adds double what it costs.
For example, installing a swimming pool probably won’t add any value. But you may find yourself justifying the decision with the belief that it will. You won’t have to go far to find a pool company that will back you up and encourages you to spend on lavish landscaping that will leave you with the mother of all mortgages.
Make no mistake, a swimming pool is a lifestyle decision. There is nothing wrong with that if it is important to you.
Just be aware, it’s like taking a holiday. It adds significantly to your quality of life but not to your bottom line.
Actually the quality of life bit is just until the kids leave home. Then you’re the bunny spending your weekends cleaning it!!
Other renovations that can tempt you to go overboard on are new kitchens, hardwood timber floors, doors, and windows. Others are extensions, expensive landscaping, technology systems, appliances, etc, etc…
Before you start glazing over, it doesn’t mean you can’t renovate, but be smart about it. Get educated and research what will add value. Then execute your renovation in a cost-effective way.
Look for hidden cash flow.
When you get to the point of refinancing your home to start building a portfolio, you will need both equity and cash flow. Often the cash flow trips people up, they will have oodles of equity but don’t earn enough to get the loan they want. Finding hidden cash flow in the family home is like hitting the jackpot.
Whether it is a room you can rent on the short term market, space for a granny flat, or the capacity to rent storage. Some people run a business from home and save the cost of renting premises. Others rent their homes out as film sets. I once had a business partner who was always looking for terraces with a sidewall to rent out for advertising.
The possibilities are only limited to your imagination.
There is a saying that “Charity begins at home.”
Well “Financial freedom begins at home” too.
The cheapest investment is the one you find in your own backyard.
Many people are making the most of the Airbnb windfall by renting out a room or a granny flat. Before you go down this path, check with your council, and get advice from your accountant as it can impact the capital gains tax exemption of your family home. Try to make the Airbnb room independent of the rest of the house. If you can give your guest access to a bedroom and ensuite with a private entrance, you will earn more. Your guests will love you for it and it will have minimal impact on your family life.
Tap Into the Equity to Build that Portfolio.
Okay, so you have jacked up the value of your family home and you have extracted the hidden cash flow. The next step is to start planting the seeds for your portfolio. You need to make sure that you structure the finance in such a way that you don’t expose your family home to unnecessary risk. Build a virtual moat around your family home to quarantine it from anything unfortunate that might happen with the investment properties. Like it or not, investing is like a business. The last thing you want to do is to expose your family home to any investment risk.
There are two ways to do this.
Firstly, work with your accountant to use a legal structure to put a wall between your investments and your family home.
Avoid cross collateralising the loans. Work with your broker to ensure that the loan for the investment property is sourced from a separate institution to your mortgage.
The family home can be either a liability or an asset depending on your mindset. If you want it to be an asset so you can harness the available equity there are a few things to keep in mind.
Firstly, create your master plan for improving the property to needs, but to build solid equity, then tap into that equity to build your portfolio and long term wealth
Keep your emotions in check when making renovations, learn to produce champagne on a beer budget so that you not only have the house of your dreams but you also get leverage to build long term wealth.
Look for the hidden cash flow in the property to help scale up your borrowing capacity.
Then when you get to tap into the equity in your home, make sure you build a virtual moat to protect your family home using the legal structure and avoiding cross collateralisation.
If you put a plan in place and take action you will join an elite group of investors who have leveraged the equity that they have built-in their family home to secure a bright financial future.
Case study: Lucy came into our Bootcamp with plans to extend her family home in Blackburn. She wanted to add a bedroom, a bigger laundry, and an outdoor entertainment area.
The home had an underutilised dining room and had the capacity to achieve the outcome she wanted without the extension. With a little reorganising Lucy was able to get the improvements her growing family needed on a fraction of the budget.
She went ahead with the hardwood deck the new plan now allows for a double carport rather than a single which is also a valuable addition in an area where most families have 2 cars. So, the change in tactics not only saved her $80,000 but it also added significantly more value.
Lucy’s renovation made a separate bedroom and bathroom with independent access available to list on Airbnb. When you have children, you need to be mindful of the impact of your decisions on their well being. Lucy is able to set up her Airbnb suite so it is well removed from her family.