Equity - What is it, and how can you create it?

Crown Money, where we show you how to pay your home loan off in up to half the time of a normal bank loan. Hey, I'm Jessie Edge, and I'm joined today by CEO and founder Scott Parry. How you going, Scott?

Terrific. Thank you so much. How are you?

Yeah, really good. Thank you. Great topic. Today we're going to talk about three ways that we can create equity in our property. And, you know, I just wanted to start the ball rolling by saying, Scott, what is equity?

Equity is the difference between what your house is worth and what you owe. That is, if you have a house worth $500,000, you owe $400,000, you have $100,000 worth of equity.

Brilliant. And why is equity important?

Equity is important for many reasons. One is it creates a buffer, a springboard into your next property. If you're going that path to buy an investment property, your equity can be used as your depos, your stamp duty costs. Equity is great to build in the property. So basically, equity equals debt reduction. And then the more equity you've got, the lower your debt is, the lower your payments are, the faster you're going to be paying that debt off.

Absolutely. And it's also improving your net worth. That is, at the end of the day, you know what you've got that you could potentially sell in the future, Cash in. And that's money. That's your money. So equity is very important. It's one of the number one goals for all property, is to continue to build equity. So that's what we're going to talk about today. So the three ways that we can generate equity, let's go through them. Scott, what are the three ways that we can generate equity?

So the first is capital growth. Now, that is out of our hands. If it happens, great. But we can't control it, therefore, we can't worry about it.

So that's growth within the market. That's the market actually moving itself, is that right?

That's right. So if you hear that your property prices have gone up 5% due to the capital growth in the area, that is 5% worth of equity that has been created through capital growth or market forces which come back down to demand and supply.

Absolutely. And that's, you know, that's. Every suburb is different, every area is different. A street could be different. So that's something that you can't control. I mean, that, that, that is maybe a factor that you think about when you're actually purchasing the property in the first place. You're looking for areas that have more potential for equity, for, for growth. And that will help build equity. But that is definitely something that is out of your control.

Absolutely. So the second one or second way to create equity in your property is to pay down debt. We're all about this. As everyone knows. We've spent the last 18 years helping over 6,000 Australians pay off debt or create equity in their homes. I think the word debt reduction is sort of got a little bit of a tainted brush to it. Whereas equity, everyone wants more equity. And so accelerating the amount of equity you create in your home is probably one of the smartest things you can do financially. So paying down debt on a 30 year home loan, if you can have that paid off in under 15 years, that means the amount of equity that you'd be creating would be probably close to 25 grand per year, which I think our average clients pay or create 25 grand a year in equity in their equity.

And it's important to think of paying down debt as a guaranteed investment. You are guaranteed a return on the money that you put into paying down your debt because interest saved is interest earned. So whatever your interest rate is on your home loan, by paying down that debt, you are saving yourself having to pay that interest. So in effect you are earning that amount of money. So that's a really good place to be putting money.

Yeah, it's just, it's investing in debt, you know, I mean this market at the moment, no one knows what's going on. It's so uncertain. We don't know if you're going to make money in shares or lose money in shares. You don't know if the property market's going to go up or going to go down. So one of the guarantees in life is investing in debt and that's really putting your money into your home loan so you can reduce that balance. And as Jess was just mentioning, there interest saved is interest made. If you've saved $500 in interest, it means you've just made $500 in interest.

Absolutely, yeah. And what if somebody doesn't have any owner occupied debt so they've only got investment properties, Is it still worth paying down debt?

Yeah, that's a great question. A lot of people in that mindset, okay, if I don't have any home loan debt, what shall I be doing with my money? Personally, this is just my personal belief and the way I've sort of operated with my property portfolio is I want to pay down my investment properties to zero so that I can receive that passive income stream in retirement and where that Sits is If I've got 2, 3, 5, 10 investment properties and they're all debt free, that means I've got passive income streams coming off each of those of 5, 6, $700 per week. And so that is the key to retiring early. Having your passive income stream equivalent to your living expenses and by paying that debt down on that investment property, when you've got no other bad debt would be the smartest thing to do to continue to enhance your passive income stream.

Absolutely. A lot of people would argue that, but you know, my repayments are tax deductible, so it's better for me to keep my debt as high as possible for as long as possible. What would you say to that, Scott?

I think it's overrated. I mean, the tax deductions. If you're doing anything in life for a tax deduction, you're basically losing money. And that that's what a tax action is. You know, you're losing a dollar to get 30 cents back in tax. I just much rather make a dollar get taxed 30 cents.

Yeah.

Still 70 cents up versus the other guy who's 70 cents down. So, yeah, anytime anyone is trying to sell you anything based on a tax action is alarm bells. You should be running. You don't want to be focused on trying to generate tax deductions because that means you're losing money. And for me, cash is king. And cash flow coming off these investments passively is the absolute fast track to getting your time back and not having to go to work.

And I think the whole, the tax deductibility of investment properties really comes into more effect when you're seeing a lot of property growth because you're willing to pay a bit. So you're losing some money, but you know, you're getting it back in the growth of the property. But if we've got a property market that's standing still and we've got interest rates that are so low, you know, why are you paying money to hold onto this property? You're better off earning the income stream from it and paying a little bit of tax out of it.

Absolutely. I just spoke to a client last night. So they've got an investment property. They owe just over 200 grand on it. It's worth 500,000. They don't have any other bad debt, credit cards, personal loans or home loans. They're rent vest so they rent where they live and just keep continuing to buy investment properties. And I was just saying to them, they've got this position of having it on interest only and not paying it down. And I said, guys, in $200,000 worth of debt, you could have this paid off in eight years and have a passive income stream of $400 per week in today's rent coming in for the rest of your life on top of your super fund. And so I see every property as a super fund. And so I acquire a property, pay that down, and I'll look at all those properties in the Portfol 55 or 65 whenever I get to retirement. But I just really think my investment properties are my super. And that's just my strategy.

Absolutely. And it's a great strategy. Definitely. All right, so those are two ways that we generate equity in property. What is the third way? Something that we have a lot of control over.

The third way to create equity in property is to renovate or manufacture equity. And what I mean by manufacturing equity is really about actually doing modifications, primarily cosmetic renovations to your house. And so a prime example of this is you've got a house, it's a little bit dated. The kitchens are a little bit out of date. The bathrooms are very tired. I mean, you can do a renovation on your kitchens and bathrooms, and for every dollar you spend, you should be getting $2 back in value. The best part about this is the government with COVID have just bought out some huge grants where they're able to give you $25,000 if you are doing a home renovation. There obviously are a few eligibility criteria where the renovation's got to be at $150,000 or more. And then from there, you'd obviously be adding on a bedroom or adding on a second bathroom. And from there, the government's going to fund $25,000 of that, which is 25 grand worth of equity straight off the bat, not to mention the growth or the equity you manufacture because you've done the bathrooms and kitchens, you've done maybe some landscaping and a paint job.

The other thing, one thing that I really like about this particular method as well, is that if you are improving the house you're currently in and making it more livable and more enjoyable, you're more likely to stay in that property for longer. This is one thing we talk about, is that everyone in Australia is obsessed with upsizing their property. Buying the next big beautiful property. It really isn't a obsession we all have. But if you can, every time you do that, it costs you hundreds of thousands of dollars, not only in the transfer costs of stamp duty agents, fees, that sort of stuff, but also in how about how Much further back, it puts you on your debt reduction goals because you're usually buying a property that's more expensive, taking out more debt, increasing your repayments. And so you're going backwards on your goals. So if you can do, say, 50 grand worth of renovations on the house you're in now, and that means you stay there for an extra five years, then that's not just costing you 50 grand, it's actually saving you probably another hundred grand at least.

Yeah, that's such an important factor. I mean, these days, I think the average Australian is moving every seven years. And when we've seen clients over the last decade who have stayed in their property for 10 years, their mortgages are so low, their cash flow going towards debt repayment is minimal, and their lifestyles are so much better than those who've got the bigger, better home with the bigger mortgage and the higher repayments. So if you can really just bite the bullet and just really call it and say, okay, rather than buying a bigger, better house and paying 50, 70 grand in stamp duty, plus the agent's fees to sell your place, and you can just put that money, rather than into the government's pocket or the agent's pocket, into a renovation on your own home, you're going to put a dollar in, you're going to get $2 back out, your home's going to be more livable, more enjoyable, and when you do sell it down the track, you're actually going to get more for it.

Yeah, absolutely. Such a good strategy. So, Scott, when it comes to renovating your own property, let's just go over again. What are the key areas that you should renovate?

So to get the best bang for buck, you really want to be focusing on areas where new potential purchases or valuers are attracted, such as kitchens, bathrooms, a coat of paint and landscaping. They're probably the four key areas which you should focus on, mainly cosmetic. As I said, if you're going for the government grant, you've got to be doing $150,000 renovation, which really means you're going to be doing something more structural. So that means adding an extra bedroom, adding another bathroom, those sort of developments, to get that $25,000 grant from the government. But if you focus on the cosmetic ways, it's clean, it's simple. There are actually some companies out there that will do the renovation for you and you pay when you sell. Obviously, that's for mainly people who are looking to sell relatively soon, but if you do pay beforehand, then they'll actually give you a Discount. So yeah, there are actually companies out there who do the full renovation for you before you sell and then as a result you just pay them when you sell.

That's awesome. Such a good idea. And you know when people are doing these renovations, how do they make sure they're not over capitalizing?

Critical. So many people fall into this trap of just going all out and unfortunately not getting that $2 back for every dollar they've spent. So you want to look at the stats. So if you type into Google your suburb medium house value, that will tell you the medium house value in your suburb. So let's do some quick numbers here. So let's say for example, you've got an $850,000 house, the medium house value in your area is 800,000 and you want to do $150,000 renovation. And, and what that really means is your house, you would hope to be around about the million dollar mark. However, the median house price is only 800,000. So what that is going to mean is that you're probably going to struggle to get that $2 for every dollar you spent back in value. On the flip side, let's look at another example. If you've got a house that's worth say 500,000, the medium house price is 750,000 in your area and you spend that same 150, then you very, very going to get that two for one value back. So yeah, very important you look at the medium house price in your area, you really want to be making sure that you're not overdoing it and not getting that money back. We have seen some people in the past who are in those sort of outer suburbs, right, like 20, 30 kilometers from the city and they've put 100 $200,000 renovation in and as a result they have really just got the valuation back as what they paid for. They actually haven't. Generate or manufacture. Yeah, I mean you've got all these builders in your face for six months, you've got dust flying everywhere. I mean, it's not a pleasant experience, especially when you've made your money out of it.

So yeah, absolutely. I think as well there is a big difference in renovating for growth and for long term versus renovating to sell quickly. Renovating to sell quickly is usually done a little bit cheaper and it's usually just very, very basic cosmetics, not investing much in the tile choices and that sort of stuff. Whereas if you're investing to create genuine equity and you're going to be staying in the property for another five to 10 years. It might be worth spending an extra few thousand dollars to get a better, say, tile choice or cabinetry or something like that. So it lasts longer, looks better, and will generate a little bit more of that equity for you.

Yeah, I mean, the easiest way to think about it is what do you like and what do you find attractive? Because that's what other people are probably going to find attractive as well. So when you are looking at tiles or backsplashes or kitchens or bathrooms, just go for something that appeals to you and there's every chance it's going to appeal to the masses as well.

Absolutely. That's awesome. Look, I think we've covered everything in this topic. Is there anything else you'd like to add, Scott?

No. I mean, manufacturing equity is a really great strategy. Renovating is probably the smartest strategy at the moment. With the government grants around, paying down debt. Great way to manufacture equity as well or create equity. And then that capital growth is just that, icing on the cake. Something which you can't control, but when it does happen, it's beautiful. And something where it doesn't happen every year, I think over 10 years, you probably get three years of strong capital growth. You get some years of going sideways, and then you might get some years where it just retrace. So nothing goes up in a straight line. You'll never get a capital growth graph going vertical. It's going to be sort of up and down, up and down. However, the only day the property price matters is the day you sell.

Yeah, that's such a great one to remember. It really is. Nothing matters until you're ready to sell. All right, Scott, thank you so much for today. It was great to chat with you and looking forward to chatting to you again soon.

Definitely. Have a great day. See you soon.