How Can You Use Equity to Create Cash Flow?

Why do we invest? 

We invest to create passive income that not only keeps flowing in continuously but also gradually grows in value, giving us a sense of security, extra income, enabling us to indulge in things we love or further invest it, depending on the investors goals and plans. 

Every investor is well acquainted with the fact that when we talk about creating passive income, equity plays a significant role when it comes to real estate investments. 

To build a sturdy source of passive income using Equity, one must keep four very important things in mind for the best results.

Step 1 – Quality Over Quantity

When investing in real estate, we shouldn’t jump the gun and focus on only building our portfolio, thereby investing in anything and everything. While making a property checklist, do not forget to pencil in ‘quality’ at the top of the list, as it is one of the most crucial factors you should look into when investing in a property. The quality of the property is directly linked to multiple other factors like the location, the neighbourhood, the quality of the tenants, the amenities around and the speed at which development takes place around the property. See how one simple thing can change almost everything in the equation? So don’t forget the quality because it eventually determines how your property will start to gain equity, that is, increase in capital value.

Step 2 – Manage Your Finances Right

How amazing is it to know that your properties have equity and watching as they increase in capital growth? Extremely, right? But if you don’t structure your loans, you will not be able to access all the cash you were excited about, because you’ll spend all of it on paying your loans! 

Simple solution? Take your time in understanding your finances, not over exceeding your budget and your loan structure. If you need some help and advice, make sure to seek out the experts and get some understanding to make sure you’re starting your investor journey in the right way from the beginning

Step 3 – Dwell Before You Sell

Yes, selling property is a way to access equity in your property, but it’s not the only way. And the disadvantage to selling your property is that you’ll lose a lot of value to the selling agent and the taxes. Whatever you have left after that will go into a savings account, where you’ll earn an insignificant amount in interest. Selling to access equity neither makes sense nor is advantageous. As a thumb rule, we tell all our clients to retail their investment for 20 years to give their property time and space to go through the cycles of the market and reach its full potential.

Step 4 – Numbers Are Important

Real estate is all about the numbers. From the start one should know how much money they need to create the life they want to live and to meet their goals. Then they need to calculate how many properties they need, where they should buy these properties and how much passive income/rent they should be earning. 

It’s the same with equity. The value of the property has to be high enough for equity to be able to act as cash flow (At least $3M). Too low and it will be insufficient.

Also, taking too much equity value (More than 2%) out of your properties is going to leave you vulnerable. 

The value of your property has to be at least $3M and you should be taking no more than 2% of the equity value for maximum long term gain. 

Even though it all sounds very simple, sometimes it can get overwhelming for any property investor, especially the new ones, to manage everything. 

And when that happens, it’s best to seek expert advice! 

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