Many property owners don’t know how wealthy they really are and do not realize the potential they have to develop a property portfolio by using what is called lazy equity. Hear Michael Beresford from OpenCorp explain.
Kevin: It’s quite incredible, but many property owners don’t realize just how wealthy they really are, or they don’t realize the potential they have to develop a property portfolio by using what is called lazy equity. There are a few reasons for this. To help us understand it, I’ve invited Michael Beresford, who is the Director of Investment Services at Open Corp, to explain.
Michael, thank you so much for your time.
Michael: Hi, Kevin. It’s good to talk to you.
Kevin: Firstly, what is lazy equity?
Michael: Lazy equity is basically equity in a property, typically someone’s own home, or maybe an investment that they have already that they’re not using. To use a simple example, let’s say that the property is worth $500,000. The bank will lend 80% of that, which is $400,000. If there’s a mortgage of say, $150,000 against that property, then the difference, being $250,000, is what’s called lazy equity.
It’s really interesting. Talking to a lot of people over the last ten years helping them with their investments, I’ll say to them, “If you had $250,000 available to you, would you invest that or would you stick it in a garbage bag and bury it in the backyard?” Nearly everyone has told me that they would invest it. But in reality, very few people actually do.
Kevin: Is it because they don’t really realize that it’s there or that it can be used, Michael?
Michael: Typically, it’s two things. It’s that, and it’s also they’re not quite sure how to get their hands on it. Really, it’s a very simple process. It generally takes two to three weeks and a little bit of paperwork and dealing with the banks, which is not everyone’s cup of tea. But it’s a very simple process where you apply to unlock that equity.
The bank will do a valuation on the property, so they’re lending against their assessment, and basically give you access to some or all of that $250,000 depending on how much you service for and how much you want to take out. It’s really a lot more simple than most people think.
Kevin: Once I understand how much equity is there, how do I use that to continue building a portfolio?
Michael: First and foremost, you apply to get it released and available to you, and then it’s just really money that you can use for investment. You set up that equity loan or line of credit, which is interchangeable terminology that banks use. Once you have access to that, then you use that money to cover the deposit and costs portion of the investment property that you’re looking to buy. Then typically, go to a different bank to get the loan for the remainder. That way, your own home stays separate to the investment and is not cross-tied with the banks.
Kevin: Are there any restrictions that the bank would put on me if I do actually set up that line of credit or that extended financial availability?
Michael: Yes. There are two components to the financial recipe in terms of what banks will lend to you, Kevin. The first is the equity side of things. Does equity actually exist that you can access? If that’s the case, they will do a lending assessment based on your servicing, as well – or how much income, whether it be your salary, rental, and so on – that will determine how much you can actually borrow. Provided that your servicing is okay, then you’re able to access as much equity as you have in the existing property.
Kevin: Yes, you make a good point there about servicing. I guess that’s the other thing. Just having the equity there doesn’t necessarily mean that I can use it because I have to be able to service any borrowings.
Michael: Exactly right.
Kevin: That’s probably one of the major restrictions the banks would have. They would look into how much income I’m earning now.
Michael: That’s one thing they’ll look at. They’ll look at not only your income, but they’ll look at rental income from any other properties that you might have. Family tax payments, depending on if there are dependents, can be factored in, as well, or any other income that might come from a part-time business or anything like that. It’s really important to disclose all of the different income sources that you have access to, to increase your likelihood of being able to get access to the money.
Kevin: Michael, you mentioned there, too, once I do get access to that equity, then go to another bank to borrow for another property. I think I’ve heard you talk about concentration risk. Can you explain to me what that is?
Michael: Yes. The main thing that you want to do – and this comes from personal experience many years ago – is maintain control over the money that you borrow. In short, concentration risk is having everything with the one lender. The issue with that is that they call the shots.
What you want to be able to do is to not only keep your own home separate to the investments that you do, you don’t want to have your own home as security against the investments. That’s very simple to avoid. You get the equity loan set up as we talked about, and you go to a different bank to borrow the rest.
Most people feel they have a relationship with their bank. The marketing departments that these big lenders are geniuses; they market a relationship. What’s easiest is you go back to the bank that has your mortgage already, and that’s how those properties get cross-tied.
It’s an extra application and a little bit more work but well worth it to keep the control and have your own home secured separately.
Kevin: Always good talking to you, Michael Beresford. Michael is the Director of Investment Services at Open Corp.
You’re doing a lot of work, too, in the Southeast Queensland area, as well, Michael, aren’t you?
Michael: Yes. The Brisbane market is really well placed from the property clock perspective in our opinion. I bought a couple there this year myself, so yes, I’m looking forward to hopefully some growth in the years to come in the Southeast Queensland market.
Kevin: Is it right across the Brisbane market or Southeast Queensland, or are there particular areas that you’re focused on?
Michael: We’re concentrated more in the north. We have some big natural barriers to urban sprawl and a lot of government investment in the principle activity centers located throughout the north of Brisbane, so that’s typically where we’re focused.
Kevin: Good on you, Michael. Thank you so much for your time. Michael is the Director of Investment Services at Open Corp. Thanks, mate.
Michael: Thanks, Kevin.