How to use your own home as part of a wealth accumulation strategy.

Welcome to Finance and Fury.

This episode will be about using your own home as part of a wealth accumulation strategy

1. Some strategies that I plan to do

First – what is a home – a lifestyle asset – is still technically an asset as it has a value – as long as someone else is willing to buy it off you

1. I personally have never really seen a home as a financial asset – it technically losses you cashflow when it has a mortgage – and even when it doesn’t from a mortgage if this has been repaid – with rates, body corporate, ongoing maintenance costs for upkeep on the property
   1. Classification – Can you live off it? anything that doesn’t make you a passive income but instead loses you cashflow cant be used for financial independence
2. Property ownership is expensive – mortgage is normally the biggest expense –
   1. PI loans eat a lot of cashflow – but the P component can be treated as forced savings that you can’t use
      1. But does decrease your I payments over the long term
   2. However – whilst your own home is a lifestyle asset – it still has wealth/equity in it – What is home equity? 
      1. Wealth inside of your property – Most homeowners build this over time with debt repayment as well as property price growth – which is calculated as the total value of your home minus your home loan. The equity in your home increases as you continue to pay down your loan. And if your property’s value increases, your equity also increases.
      2. Not advice but a strategy – Create a separate loan facility as an investment loan to release this equity for investment purposes –

Debt – Leverage – Borrowing money to invest –

1. Agree or not – $100k is more than $50k? – it is –
   1. Borrowing to invest allows you to Increase value of what is invested
   2. Technically your net wealth hasn’t increased initially – but over time this ideally can change
2. Returns come in percentages – the greater the level invested – greater nominal returns at same percentages
   1. We are locked into same percentages for ASX – Different values
   2. Rich getting richer – more to increase at same percentages
3. Does debt go up with inflation in value?
   1. No, you pay interest instead
   2. Why you borrow to invest in something that grows, not keep in bank account.
   3. Time goes on, your investment increases, debt doesn’t.

1. Borrowing funds to invest is a strategy known as leveraging.
2. principle of increasing the size of an investment expected to get long term capital growth.
1. Good Debt – If you borrow to produce an income, normally deductible interest. Plus if you invest in something that grows, you should have a higher total return over the long term than what
2. Bad Debt – this is the PPR loan –

Leverage works better from growth and not cash flow.

Having it is neutral cashflow position to slightly positive is the aim to maximise leverage – especially for property

1. Pay back loan – Lower LVR = Lower multiple of growth, but lower repayments for cashflow.
2. Increase loan with value = Increasing multiple of growth, but higher repayments.

How it works when investing outside of property

1. Options
   1. Home equity – Borrowing equity to buy shares, or managed funds
   2. Debt recycling – borrowing more each year and using the income from investments to pay down bad debt

How to start

Example: Property – Initial purchase and building equity

1. Utilise equity of $100,000 to purchase a property for $500,000
   Borrowed funds – LVR 80%.
2. Three years – 8% growth return = $40,000.
   1. Growth return on the equity of 80% – $32,000 in available equity
3. In addition – you will have repaid some of the loan – $375k in value by this stage as well with standard monthly PI repayments – ($25k) – so in total there would be $57k of equity available

Next step – deciding on how much to utilise of this and how to invest it –

4. May not be worth it to borrow the full amount again –
   1. Taking the property back up to 80% loan may just cost you additional cashflow –
   2. Interest payments – Have to repay interest on the borrowings.
5. The borrowing of funds against a property for investment purposes. The process involves having the home revalued – so the valuation may not have additional equity
6. How to invest and where to invest –
   1. How to invest the funds – lump sum, DCA, or monthly investments – example of these options
      1. Lump sum – putting the $57k into the market at one time
      2. DCA – breaking up the investments for 5 months – $11,400 p.m.

• Doing monthly investments moving forward from the account – $2k p.m. for just under 2.5 years

1. Aim is to try to minimise risks and maximise possible return – as the funds are borrowed, want to take some additional conservative approaches – such as DCA –

1. Where to invest the funds – want to be diversified

7. This is just a home equity investment strategy – taking it to the next level – it would be a debt recycling strategy
8. Debt recycling works similar to the home equity release for investments – but you do this every year
9. Involves refinancing and increasing the size of the investment loan each year and investing the funds
10. In the previous example – PPR loan would be $365k – so a further $10k of debt repaid – this could then be released in the second loan and investing the funds

Example – Your property of 500 has grown to 700, your mortgage at 450k.

1. If the value is $700,000 and the current loan is $450,000,
2. $110,000 can be borrowed to a LVR of 80%.
3. Initially $30,000 is invested with monthly investments of $3,000 established.

Worth it to leverage?

1. Hurdle rate – the minimum rate that you expect to earn when investing.
   When borrowing to invest, your hurdle rate will be the cost of borrowing the funds (interest payments).

Downsizing risks – Where it goes wrong

2. Wrong investments Shares or managed funds?
3. No liquidity, or not reducing investment time risk – DCA
4. Disposable cash flows low – job security
5. Panic selling or being forced to sell
6. Buffer account – lower LVR or surplus cash

My plan – spend the next 12 months paying down additional debt – borrow – then invest those funds in a portfolio of managed funds over a 3-5 month period – do this again for 5 years – ideally – in 10 years time there will be no bad debt – only investment debt – depending on interest rates – either redirect investment income to pay down loan – or reinvest still –

Summary

1. Leverage for growth
2. Risks can be worth it if done correctly.

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