Many aspiring Australian property investors, more specifically those defined — sometimes unfairly — as “Mums and Dads,” are failing to begin their property investment journey due to not only a lack of access to capital, but also failing with regards to investment education.
Contrary to what news headlines will have you believe, the average Australian homeowner has access to significantly more capital than they may think. In fact, it’s common practice in the news media to use unfair ratios to describe how Australian families are living below the poverty line. This oversimplification uses the following formula –
value of the home-mortgage+assets=
This leads many to believe that they are struggling and it is this mindset that often drives investment behaviour with regards to the average Australian. What the above formula fails to take into account is that there is often a significant amount of latent and available capital in the property. This equity can be used as ‘realised capital’ to reinvest in a cashflow positive or capital positive strategy that can increase the options available to investors.
The strategy is called debt recycling, and it has been lambasted by critics for supposedly encouraging uneducated investors to risk their property. This statement is of course entirely correct, and absolutely wrong.
No uneducated investor should ever take any form of action that could put them or their family in financial peril, but it’s through education that strategies such as debt recycling become more accessible. You see, the strategy isn’t about risking the family home, (although as with any investment strategy there is an element of risk) it’s about taking an existing resource and maximising it. Latent equity is the equivalent of having money in the bank that depreciates in value over time. Through market fluctuations, inflation and economic variables, the value of money that does not appreciate in value reduces over time. This isn’t to say that your property won’t appreciate in value, but the equity you have already earned will not. Accessing that equity does not impact directly upon the value of the property as these are two separate things.
Australian investors should educate themselves as to the available resources they have, and the options available to them. Through debt recycling and other available strategies, the average Australian homeowner can put themselves in a position where they are in the driver’s seat with regards to their own financial position.