In this article:
Tonight on A Current Affair Mark Bouris discusses the key ways to derive wealth from the family home.
Some of the tips and topics include:
Leveraging equity from the family home to buy investment properties. Broadly speaking, there are two ways to look at your mortgage. The first is to see it as a debt, with a negative balance that you're paying off over time. A far more positive viewpoint however, is to look at it as a means of building equity: the gap between your property’s value and your debt. This can be used to secure a loan for a second investment property, which can actually help to ensure your mortgage on the family home gets paid off quicker. With home loan interest rates being generally lower than personal or credit card options, using equity from your principal property is a great way to diversify your portfolio and maximise your return on investment.
Renovating for profit. After you've lived in your family home for a few years, it's quite common to start thinking about renovations. Before you throw thousands of dollars at a bowling alley in the basement, think carefully about what will actually add value to your property when it comes time to sell. Many assume that adding X amount of dollars will translate into an equal or greater return when the property goes on the market. In practice, this often isn't the case. Swimming pools are a great example, being an expensive addition, but one that not all Australians are looking for in a property - especially when considering the cost of cleaning and upkeep. Instead, focusing on the necessities like an extra bathroom will help you to grow your wealth when selling, while cheaper additions like a new fence can provide a far better return than expensive renovations.
Downsizing to fund your retirement: when it comes time to retire, the family home is often larger than we need. By downsizing, you can release funds to invest in cash generating investments to help fund out retirement.
Consolidating debts into your mortgage
Helping children onto the property ladder by acting as a guarantor or through a family pledge. It's becoming harder and harder to get onto the first rung of the property ladder, and this is a concern that many parents have when thinking about their children's future. The biggest obstacle can be getting the capital together for a deposit. Without this, it's very difficult to get a loan, but a fully paid off family home provides a tidy solution. This is what's known as a 'family pledge', and essentially it means a parent's property can be used as security for 20 per cent of the loan. Having this pledge makes it far more likely that a bank will approve your child’s application. In fact, one major bank reports that as many as 10 per cent of its property loans make use of a familial guarantee.
Exemption from capital gains tax and more. Your family home is the only capital gains tax free vehicle ever. Long term capital growth of a property that is exempt from CGT will far outstrip any negative gearing or other taxation packaging benefits. Even from a simplistic superannuation and pension perspective, the family home is entirely excluded from the income and wealth means test (so, if you are asset rich in primary residence only, it doesn't impact your pension entitlements).
The A Current Affair story features the case study of Jarn Elias of Sydney Renovations Hires www.sydneyrenovationshire.com.au. He and his family have used the family home to grow their wealth by accessing the equity and investing in a property portfolio. In fact, they have added four properties in the last three years. Their professional passion for renovations ensures they continue to leverage their property portfolio to grow their personal wealth.
These topics and more will be discussed in details at the upcoming Prosperity through Property series www.ybr.com.au/markbouris - tickets are still available.