Use equity in a $500,000 property to make $10 million

Anyone with a $500,000 property can take advantage of this trick to make a fortune of $10 million – without using any of your own cash.

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

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 ($500,000 – $300,000).

In Australia, banks will typically lend you up to 80 per cent of the value of a property that you can then use to invest. You need to be able to service the mortgage, i.e. have a stable income and buy a property that will give you enough rent to cover the ongoing mortgage costs. As long as the numbers stack up, banks are generally comfortable to lend.

When you own property, over time your property will increase in value, meaning your equity will also be increasing. You can then borrow against this equity and use the money for further investing, most commonly with property.

How equity release works

There is a bit of complexity here, but it’s also pretty straightforward when you know how the rules work. The short version is that as your property value and equity increases, the banks will get more comfortable to lend you more money against the increasing value of your property.

When you buy your first property you generally need to have a cash deposit. But once you have property equity, the banks will generally 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 fastest pathway to serious wealth.

I’ve outlined an example below showing how property equity will grow based on a $500,000 property purchased with a 20 per cent deposit, using the long-term property return of 6.3 per cent, showing how much money you could potentially borrow at any point as the value of your property increases over time.

In the early days, the growth in your equity is slower because you’re starting with a lower base, but you can see that as your momentum builds that the year-on-year increases start accelerating.

I’ve then updated this scenario below showing what it would look like when you build enough equity to then purchase your second property.

You can see from these figures that even introducing one investment property with a value well below the Australian average property value of $928,812 has a serious impact on how quickly your assets will grow over time.

After 40 years, there’s potential to have $10,074,932 in wealth.

If you can manage your risk well, it’s possible to go beyond this and amplify your results even further.

So what’s stopping you?

You can see from the futures above that using property equity to invest is a powerful way to grow your wealth. We know this is possible. We know the bank’s rules and when they’re comfortable to lend.

But here’s the thing – increasing your debt levels can be pretty scary. Particularly in the interest rate environment we’re facing today, it’s natural for you to be fearful about taking the leap to purchase property.

This fear is driven from fear around the potential for you to make a mistake that costs you a heap of money. This fear is completely natural, and exists to protect you. Playing it safe and sticking to where you’re at feels comfortable, and is nice and safe.

But ‘safe’ won’t make you money. And while fear can stop you from making a mistake, if you let it, fear will stop you from playing a bigger game.

The power of a property plan

Buying property comes with risk. But most of these risks can be managed and minimised – if you take the right approach.

The key to managing risk well is to map out a solid plan. One where you know you’re ready for rising interest rates. Where you have a good property that will grow and deliver the results you’re expecting. And where you know you’re able to invest through property and live the lifestyle you want without making drastic sacrifices.

When you take the time to map out your plan, the why, how, and when of the ideal property strategy for you will become clear. You’ll be able to set things up in a way you’re confident your risk is managed, and give yourself total confidence to take action.

The wrap

Property investing isn’t for everyone, and using borrowing to invest does increase your risk and should be carefully considered. The right move at the wrong time is still the wrong move. But, property investing with equity is something that has the potential to build serious wealth and accelerate how quickly you get ahead with your money.

In the current environment, there’s a lot of fear out there around property. But in my view, there are also a lot of opportunities – if you’re smart about how you set up the ideal property plan for you.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth, the host of the How to be Successful with Money podcast, pivotwealth.com.au/how-to-be-successful-with-money-podcast/ and author of the Amazon best-selling book Get Unstuck.

Ben runs regular free online money education events to help you make better money choices and get ahead faster. 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.