More than 20 years ago property guru Jan Somers bought a property that led to her becoming wealthy.
She had a simple philosophy based on a straight-forward technique – buy what you can afford, wait until it goes up in value, refinance the property and use the extra equity as the deposit for the next property, then repeat the process.
Ms Somers, a former teacher, attracted crowds throughout Australia who flocked to hear her uncomplicated message that holding real estate can make you rich. She wrote a book explaining how she turned a modest income into a financially-free future, and thousands of people followed her lead and they became wealthy, too.
The remarkable thing about Ms Somers’ story is the unremarkable nature of it. She did what most people could do and became spectacularly successful following a very unspectacular strategy.
And the basic rules which Ms Somers put into practice all those years ago have remained true to this day. Buying a property today can make you rich in the future. Your house can be your home – but it can also be the springboard for your retirement savings.
All over Australia there are people enjoying the good life now because they made a few smart decisions years ago. In their 20s they bought a one or two-bedroom unit and after a few years its value had increased enough that they could use their equity in the property for the deposit on a three-bedroom house in a modest suburb. A few years later they bought an upgraded house in a prime suburb and a few years after that they bought the first of many investment properties using equity from their expanding portfolio. The effects of inflation and the power of compound interest generated growth they could never imagine.
This is not a get-rich-quick scheme. It’s more of a get-rich-slow scheme. But it works and it has withstood the test of time, throughout several boom and bust cycles in the Australian property industry.
Which brings us to today’s market. There is no better time to move up the property ladder or expand your property portfolio than when the market is down. If you are going to buy property for $800,000 and sell one for $400,000, if the market is down 10 per cent, you lose $40,000 on the sale and gain $80,000 on the purchase.
Experience over the years has shown that owning property can contribute more to a person’s financial future than their job. In the most exclusive locations, houses can go up in value by more than $1 million a year.
Data from the Victorian Valuer-General recently showed that houses in the Melbourne suburb of Toorak increased in value by an average of more than $300,000 a year. In Melbourne, the average property grows in value by more than $40,000 a year, based on five-year averages. In Sydney, properties have grown in value by more than $20,000 in the past five years and in Brisbane, properties have increased by an average of more than $25,000.
A study by the Mortgage Industry Association of Australia found that 20 per cent of borrowers who refinanced their homes did so to buy an investment property. Another 20 per cent refinanced to renovate.
Renovating is a great way to add value to your property. Done well, a renovation can add double the value to the property than the cost of the renovation. In this case, a renovation at home – financed by equity in the property – can improve your lifestyle and open up opportunities for new investment by using the extra equity generated by the renovation.
Once your strategy of growing equity is gathering momentum and allowing you to expand your portfolio, you can choose to use the extra available cash for things other than investment such as a holiday or new car. While this is not a suggestion for inexperienced investors because it can lead to increased consumer debt which is not tax deductible, it can be used to accumulate lifestyle assets financed at home loan interest rates rather than higher personal loan rates.
The issue underlining the equity-for-growth strategy so clearly defined by Ms Somers is that equity spent on buying more property is “good” debt that supports assets that increase in value over time and is tax effective.
And it ensures that your assets are working as hard as you are to secure your financial future.
RUN Property is Australia’s largest metropolitan real estate agency which manages property valued at more than $10 billion and has a dedicated team of sales specialists in Victoria, NSW and Queensland. RUN Property – sales, leasing and management.