Equity Release

 

 

 

When considering financing the deposit and stage payments for an off plan purchase or the completion in an emerging country that is not offering mortgage facilities then equity release could be a viable option.Using the term in its broadest sense it is the release of the equity that is locked in an existing property either because it was originally purchased in cash or it has accumulated in value over time.

 

 

 

 

 

Although in some countries the term equity release may indicate a specific type of product the principle remains the same, i.e. releasing equity.

In a rising property market the latent value inherent in the property could be considerable and this makes it ideal to be released and utilized for the next investment.

Many successful investors have used this principle to build property portfolios over previous years.This is done by either a re-mortgage (because there is an existing mortgage in place) or a new mortgage (on a debt free property) then using the cash released to finance the new investment.

  

Equity Release Formula

Current value of property - current loan commitment = Accumulated equity

Case Study

• A property was purchased 10 years ago at a value of $100,000 with a mortgage of $60,000.
• Today the property is valued at $225,000 and the existing mortgage is now $50,000.
• Therefore the accumulated equity has become $225,000 - $50,000 = $175,000.

There is potentially $175,000 available to invest in another property or properties if creating a portfolio. This simply means investing in a number of properties rather than just one. They do not all need to be in the same development or even country so it allows the investor to spread the investments

Across different market places, thereby taking advantage of different growth rates and spreading the risk of those investments. In other words the investor is not relying solely on one development to be successful. Using the example above:

Case Study

Our investor releases 80% of the $175,000 equity available = $140,000 for further investment.

4 properties are identified :

• Properties A and B in Hurghada are priced at $125,000 each and require a deposit of $25,000 each
• Property C in Cape Verde is priced at $101,000 and requires a deposit of $20,200
• Property D in El Gouna is priced at $230,000 and requires a deposit of $57,500
• In total the investment is $581,000 but the initial cash paid is $127,700. The balance of funds is used to cover initial legal costs.
• Whilst the properties are being built the investor can choose to either hold on to all the properties and finance the balancing payments at completion by say a mortgage or put them up for sale and take advantage of a short term investment strategy.
• The profits gained by the sale or sales could be used for another investment opportunity or fund the completion of one of the other properties. When creating a portfolio of investments in this way it needs to be actively managed to ensure there is always sufficient cash to fund the next stage of the investment.