So, how do we go about creating instant equity? Is it guaranteed? No, unfortunately it’s not. You can’t build just any house and expect to make money. Time and time again I hear from people who built a home to put it straight on the market and either couldn’t sell it, or didn’t make any money on it. In the worst-case scenarios they lost money. Stories such as these have created the false idea that it is more expensive to build.
The equity you have in your home is the current fair market value of your home minus any mortgage you have owing on the home. Obviously, as you pay down your mortgage, the amount of equity you have increases. The equity also increases as and when the market value of your home increases. So, if you borrow money and buy an existing home, you will gradually create equity as you pay off your mortgage, bit by bit, and patiently wait for the market to go up.
However, if you build a new home, you have the opportunity to create equity instantly. For instance, if you buy a block of land and build a house, at a total cost of $400,000, upon completion it may be valued at $420,000. This gives you $20,000 in equity. Over the life of your mortgage, your property value increases, yet the mortgage value diminishes, meaning you get to build more equity every year.
How Equity Works
Let’s look at an example of how a Victorian first home owner created instant equity in 2017:
- A 400m2 block purchased during the pre-sales phase: $105,000
- Home build with volume builder: $230,000
- Fencing and landscaping: $10,000
- Total cost: $345,000
- Bank valuation six months after build: $385,000
Equity created: $40,000
This first home owner also received the $20,000 Victorian First Home Owners Grant being offered at the time, putting him $60,000 in front. That's $60,000 in equity just by choosing to build! Where else can you make that kind of money in such a short time?
Keep in mind that these results aren’t typical. Most people don’t make this kind of equity because they don’t know the rules. But our Building Home course shares the rules. Even then, it takes discipline where the majority of decisions are made with your head, rather than your heart.
Home equity is handy to have if you ever want to borrow it back from your mortgage provider, but it also makes it much easier for you to secure a loan. Additionally, it can help you leverage property investment, which can be a financial boon in your retirement. In fact, it’s because building has the ability to create instant equity that it is a popular choice among developers and investors, as they can effectively make instant money and claim depreciation to boot.
In contrast, investors who purchase an existing property are usually paying full market price.
To Create Equity, Create Value
To create instant equity, you have to know exactly what brings value, and not just to you, but to the majority market. You have a better chance at earning instant equity if you’re able to create a home that delivers a great floorplan with excellent liveability. You should consider not only what brings value to you, but what would bring value to the majority of people.
I’m inspired to explore ways of creating value at the intersection of liveability and lifestyle. It’s not as widely known as it should be that you can utilise modern building systems and processes to create liveability for a price that delivers value. Well, that’s what creating instant equity is all about. It’s about being smart with your decisions, your design and your fit-out.
These are the key points to keep in mind when designing and building your home. However, don’t think for a second that this means you are building a budget home or a cheap home. You are building a home that will give your family their best lifestyle.
And why is that so important when it comes to creating equity? Because if the floorplan and liveability of the home are able to give you a great lifestyle, then your home will give someone else a great lifestyle. And that’s where the value lies. That’s exactly what a valuer considers when valuing a property.
You need to ask yourself this: Will expensive fixtures and fittings add value to your lifestyle? It may add value to your sense of pride, luxury and opulence. But your actual day-to-day lifestyle? No, they won’t.
We are so tempted during the planning stages to add this and that. Some things are just too hard to resist. Adding hard-to-resist luxuries will add cost to your home, but not enough value to create equity.
It can be simple to build something for less than what it would cost you to buy it, if you know the rules and don’t let your emotions cloud your decision-making. It sounds deflating, but the more you use your head, rather than your heart, the more equity you’ll create.
Of course, only you can find the right balance, and I don’t want you to think it’s all about sacrifices.
Smart Decisions Add Value
I am currently building a home in a beautiful, family-friendly estate, opposite a playground. I’ve made a decision to sacrifice about $10,000 in equity because I want the house to have big street appeal. I know the gorgeous façade won’t add $10,000 of value to my property but, for the integrity of the area, it matters to me. It’s a give and take thing. If I decided to upgrade all areas of the home, then I would most certainly lose money on this job. Other upgrades I chose were a second living area, an alfresco area, a small butler’s pantry, a study and space for a caravan, boat or trailer. All these things add value.
It’s the things that will never change, or the blueprint of a home if you like, that add value.
The 5 Step journey gives you all the resources you will need to help you plan to build a home that may create equity upon completion. What a great head start to your home-owning years!
When you sign up to take the Building Home Masterclass Series you'll learn how to unleash a mountain of value that few people know exists. You will have access to all the rarely-known benefits and opportunities that building a new home presents to you.