Financial adviser breaks down how to make $266,000 during a recession

Many Aussies have pulled back from investing but downturns make millionaires and there is serious money to be made.

There are very few ‘free rides’ when it comes to money, but investing with equity is pretty much as close as you can get.

Particularly today, with property prices having cooled over the last year but now picking back up and tipped to rise by 20 per cent over the next two years – based on the current Sydney median house price of $1.33 million, a 20 per cent rise would see the average property increase by over $266,000.

There’s a bunch of money to be made by smart investors with the right approach.

But I hear what you’re saying, that in the current inflation and interest rate crisis, most people don’t have a spare couple of hundred thousand dollars to use as a property deposit to take advantage of rising prices.

This is where property equity comes in.

What is equity?

Starting with the basics, property equity is simply the difference between the value of your property and how much you owe on your mortgage. For example, if your property is worth $500,000 and you owe $300,000, your equity is $200,000.

In Australia, banks are generally comfortable to lend up to 80 per cent of the value of a property so long as you can service the mortgage. This means you can borrow your property deposit and all costs, meaning you can buy a property to take advantage of the predicted growth – all without having to put in a single dollar of your own.

If you already own property that has either increased in value, or where you’ve made some progress paying down your mortgage, or both, this could be your ticket to the game.

How equity release works

When you buy your first property you generally need to have a cash deposit. But once you have property equity, the banks will lend you money against your equity that you can use as the deposit for your next property.

This way you could buy your second and any subsequent properties without using any cash deposit or putting any of your own money down. You’re essentially using the bank’s money to invest, growing your assets and wealth faster. This is a big part of why I believe that property is the fast track to wealth.

The table below shows how much money you could potentially borrow at any point as the value of your property increases over time, based on you purchasing a property worth $500,000.

You can see from this example that once you’re ‘in’ the property market, you’ll relatively quickly start building property equity, which in turn you can use to further grow your investments and wealth.

Once you have enough equity, you can approach your bank to get an ‘equity release’ loan and once you’re approved, you have the funds available to start shopping for your next property.

I’ve built on the previous example below, showing how your property value/wealth would grow faster when you use your equity to buy a second property.

You can see in this example there’s serious money to be made. Calling out that for this example I’m only using properties with a $500,000 value, which is well below the average property prices around Australia.

Risk management is crucial

If you’re considering using property equity to invest, your risk management is all important. You need to carefully plan your property purchase so you can afford to make your mortgage payments not just today but into the future, so you can ultimately hold your property for long enough to make the money you want when you invest.

You should also think about insurances and your emergency fund, to protect you against unexpected events or things like losing your job. This risk management is even more important in the current economic climate, and can be tricky – but it is definitely achievable if you take the right approach.

The wrap

Today there are a lot of people that are struggling to keep up with what’s going on in the economy and the world, and many people have pulled back from investing. But downturns make millionaires, and if you want to come through this period of disruption in a stronger position than you went into it, you sometimes need to take a different approach to the crowd.

So many people are sitting on untapped financial potential with property equity. They think that playing it safe and waiting for the storm to pass is the safe move – but what they don’t realise is that doing nothing sometimes is the most risky thing you can do.

Ben Nash is a finance expert commentator, financial adviser, founder of Pivot Wealth, the creator of the Smart Money Accelerator program that helps people build a second income investing faster, author of ‘Replace your salary by Investing’ and host of the Mo Money podcast. He runs regular free online money education events, you can check out all the details and book your place here

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.