The 'Usable Equity' Equation
I advocate for property being a vessel to greater wealth over time, as a way to retire early or make sure the retirement you do have is enjoyable and full of freedoms and choices.
One of the best ways to make the transition from being a home owner, as in the home you live in, to starting out in property investment and owning a rental property is to use the current equity you have built up over the years to your advantage.
'Usable Equity' is referred to by all sorts of names but I like to call it '"air money". If you have 'Usable Equity' in your current property, it is literally sitting there doing nothing. It is dead money.
Imagine if you could take that dead money and bring it back to life by using it as a deposit on a second property. Well...you can!
I sound like a sales person but my hope is that every Kiwi who owns a home can understand the simple equation that could afford you the ability to purchase a second. The NZ market has appreciated over the last 10 years by 93%. There could be hundreds of thousands of New Zealander's sitting on enough equity to purchase an investment property but they just don't realise it!
Investors flooding into the market does have the effect of pushing up prices, so government needs to further incentivise investors to build new homes, there by adding to the national stock.
The main benefit of doing the calculation is surely knowledge? What you choose to do with that knowledge is up to you! You may choose to:
- Renovate your current home.
- Purchase a piece of land to build on.
- Purchase a holiday home.
- Absorb some bad debt into your mortgage.
- Purchase an investment property.
So isn't it worth just having that knowledge of what you're actually sitting on?
I challenge each and every one of you who read this to work out the 'Usable Equity' you have if you currently own a home using the following formula:
( Home Value x 0.80 ) - Remaining Mortgage
= ($550,000 x 0.80) = $440,000
= $440,000 - $300,000 = $140,000
USABLE EQUITY = $140,000
So what does that mean?
It means you can purchase a second home, with a deposit of $140,000, up to the value of $700,000.
Otherwise you could do any or more of the options I listed above such as renovating.
This is one of the best ways to get ahead financially and means you don't have to save that $140,000 in cold hard cash which is extremely hard for anyone these days, let alone with the current savings interest rates of 0.25 - 1.25%.
If you have any questions or would like me to personally calculate your usable equity then please feel free to fill out a contact form using the link below!