Property investors need knowledge to build wealth
Most people are familiar with the phrase “knowledge is power”, and for investors who might be looking to expand their asset portfolio, it often pays to remain up-to-date regarding the market values of properties. Not only can this knowledge help to inform decisions about whether or not to grow a property portfolio, but it can also assist in determining how to finance such acquisitions.
For many investors, the concept of unlocking property equity to finance additional acquisitions is becoming increasingly attractive – largely due to the liquidity, flexibility, taxation and capital growth benefits that can often result from such.
In real estate terms, equity is the difference between the current market value of a property and the amount owing on that particular property. For example, if a home is worth $700,000 and the owner owes $300,000 on a mortgage, he or she has $400,000 worth of equity.
Depending on the personal credit circumstances of the owner, he or she may be able to use a proportion of their equity to undertake renovations, refinance the mortgage or purchase additional investment properties.
It is important to note that property equity is not fixed, but rather can change according to market conditions; that is, when a property’s market value fluctuates, so too does the proportion of equity invested in it. With this being the case, the ability to use property equity as a source of investment finance will be largely dependent on the degree of equity that actually exists within a property at a particular point in time.
As equity and borrowing capacity are inextricably linked, unless an investor has an up-to-date knowledge of how much his property is worth and how much equity he can access, he cannot properly harness his portfolio-expansion prospects.
Take, for example, an investor who has been steadily paying off his property portfolio (consisting of several properties) for a number of years. Over this period many prime buying opportunities may have come along – however, if the investor has not remained up-to-date on the market values and equity proportions within their properties, it is possible that he will have not considered, let alone taken advantage of, potentially fortuitous acquisitions.
Without knowledge of what you have now, it will be difficult to know what you are able to do in the future.
It is for this reason that annual market appraisals can be a powerful tool for property investors; they can enable an investor to remain informed of the available equity in each of their properties, consequently giving them a clearer understanding of their own financial position and current ability to make further acquisitions.
Despite the wealth of knowledge that most seasoned property investors have about the real estate market, many will remain unaware of potential sources of finance that may be sitting directly under their noses. A key way to combat this is to have an annual market appraisal – something which will enable you to gain a good idea of how much property equity you might have access to. Doing this, in conjunction with a mortgage capacity check, will place you in a better position to assess your property portfolio expansion prospects, and to be able to act quickly to secure investment opportunities, should you wish to do so.
You might not be ready to buy at the moment – however, through knowing what you can afford, you can begin looking at investment opportunities – ready and able to pounce.
Harry Bozin is a director at Century 21 Home Loans WA
