Property equity is not future cashflow
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A property can be worth a lot and still leave you short when a bill falls due. Equity is the property's value less the debt owed on it. It is wealth on one date, not money that arrives each month.
Rent is money coming in, and what is left of it after the property's costs and the loan repayments is the cashflow. A sale turns the property into cash, less the debt and costs. Borrowing puts cash in your account but adds to what you owe.
A large equity figure on its own cannot tell you how much cash there is to pay bills when work income ends.
Why can equity rise without more cash to spend?
ASIC's Moneysmart defines equity as home value less the mortgage debt, in its guide to reverse mortgages and home equity release. It is a balance at a point in time, not a payment.
A higher valuation can raise estimated equity without changing the rent or the bank balance. Paying back principal, the amount borrowed, also raises equity if the value stays the same, but that repayment uses cash. Neither change pays the owner anything.
The reverse is true as well. A fall in value lowers equity and leaves the loan as it was.
How is rental cashflow different from equity?
Cashflow is the money coming in and going out over a period. For a rental, it is the rent received less the property's operating costs and the full loan repayments for the same period, before tax. If it is negative, the money to cover it comes from somewhere else.
This is a cashflow sum, not the sum for taxable rental income. A principal and interest repayment pays some interest and some of the debt, so count the whole repayment once.
Moneysmart's investment property guide warns that rent may not cover the mortgage and other costs, and that costs carry on when there is no tenant. What is left of the rent after costs? follows the money from rent to cash left.
How much cash does selling release?
The sale price is not the amount left to spend. The loan payout and selling costs come off it, and any tax on the sale reduces what remains. Moneysmart lists agent fees, advertising and legal fees among selling costs, and notes that property is not quick to turn into cash.
A sale of a rental can produce a taxable capital gain. It depends on the sale proceeds and the cost base, the purchase cost and other eligible costs, not the mortgage balance. A former home can qualify for a full or partial main residence exemption.
The ATO's guide to capital gains tax when selling your rental property explains how it applies. So equity, cash after the sale and the taxable gain each need their own working, and Selling an investment property before or after work income ends sets them out.
Does borrowing against equity create income?
Borrowed cash comes with a debt. It is not rent or earnings, even when it arrives in regular payments. Interest and fees are the cost of the loan, and the repayment terms are in the contract.
Equity also does not decide how much a lender will approve. Moneysmart's loan rejection guide explains that lenders look at income, existing commitments and credit history. Moneysmart's pages above cover how specific arrangements work and what they cost.
What should I check in my own records?
- The valuation's date and source, beside the equity figure.
- A dated loan balance. An old statement beside a new valuation gives a wrong picture.
- Whose property it is and who owes the debt. A whole property's equity is not automatically one joint owner's share.
- The bank balance and the bills already committed, kept apart from the property's equity, so equity is counted once, as wealth, and not again as cash.
PropRetire's portfolio position shows assets and debts apart from income and spending, with each property's valuation date and source beside it. The current cashflow guide explains the payments behind the monthly figure.
So the answer to the bill question is the cash you can reach and the payments already committed, with equity counted once beside them as wealth.