Offset vs Opportunity: How Smart Property Owners Stretch Their Cash

The real estate world is a lucrative space where buyers and sellers transact with one of the best asset classes in the world—property. Not just anyone can call themselves a property owner, and if you’re the proud owner of multiple real estate properties, then you know how important it is to keep your finances in check to ensure that you can make the most of your investment. There are several strategies you can consider employing to grow your wealth through property investing. 

One is by using offset accounts, where you park money to reduce the amount you’re spending on your home loan’s interest. Another strategy is using a redraw facility, where you can pay a higher repayment amount on your mortgage and redraw the deposit back as needed. If you’re aiming to grow your wealth through smart property investments, we’ll break down the advantages of using offset accounts compared to pursuing other financial opportunities.

What is an Offset Account?

An offset account is a bank account that’s connected with your home loan or mortgage plan. It can be a savings account or a checking account, and the balance inside that account can be used to deduct the interest calculated on your loan’s principal, reducing your overall interest charges.

Here’s an example of how it works. Suppose that you have a mortgage contract of $500,000, an interest rate of 4% per year, and a balance of $50,000 in your offset account. Instead of being charged for the entire $500,000 mortgage balance, you’ll only be charged as if your balance is $450,000 for that specific repayment period. This means extra savings.

So, the math will go as follows:

• A non-offset account: you’ll be paying 4% of the $500,000 home loan per year, which amounts to a $20,000 annual interest.
• An offset account: Assuming that you have $50,000 in your offset account, you’ll only be paying 4% of $450,000, which amounts to an annual interest of $18,000.

By depositing your money in an offset account, you can reduce the total expenses tied to your mortgage. This is even more impactful when you put a big amount in your offset account early in the term, as this can lead to greater compounding savings.

Is an Offset Account The Best Way to Grow Wealth?

An offset account can certainly be a great way to store capital and reduce overall spending for a property investment. But if it’s a matter of it being the best, then that’s an arguable notion. Offset accounts are preferable if you have extra cash that you don’t intend to use in the short or medium term. This can be parked in the offset account and help reduce the interest rate of your various mortgages. 

This is ideal if your goals align. Typically, if you have a solid foundation of passive investments through real estate or other means, as well as a good amount of capital in your bank account, then you can definitely benefit from an offset account to keep your costs low. However, if you intend to use your money to continue growing your wealth, then an offset account may be too passive a strategy for building your portfolio. In such cases, there are other, more flexible opportunities you can consider to grow your wealth, like using a redraw facility.

Click here to learn more about the difference between offset and redraw accounts. And if you’re keen to learn about additional strategies, let’s take a look at these other wealth-growing opportunities below.

5 Alternative Opportunities for Growing Property Investments

When opting to put money in an offset account, you’re leaving behind an opportunity to use that money for other means, like growing your portfolio. Here are a few opportunities that many strategic property investors consider to maximize their wealth potential.

1. Rental Properties

One way investors stretch their cash is by converting their properties into one of many types of rental units. Property investors may opt to seek out a house, unit, or apartment and lease it to prospective tenants after refurbishing it. The rental income can cover the cost of the mortgage repayments and then some. Eventually, once the mortgage is paid out, the rental income will become profit.

Being a landlord can be tough work, but it’s a good way to earn money passively. That said, it’s crucial to familiarise yourself with the laws, taxes, and other pertinent details you need to know before you can start this venture.

2. Flipping Properties

Another way you can use excess money instead of putting it in an offset account is by flipping properties. This process entails finding a property at a good deal, renovating it, and then selling it at a higher price.

This strategy shows good potential for high returns since land tends to appreciate over time. That said, it can also be quite risky, especially if you’ve invested in a property that has inherent issues like being flood-prone or having some inherent problems in the construction. The active sales effort can also be quite bothersome for busy individuals. In any case, well-prepared investors can earn thousands of dollars for every property they manage to successfully flip, so if done wisely, this is a fairly effective way to earn money through property.

3. Invest in REIT 

Don’t have enough capital to justify a property purchase just yet? No problem! You can consider buying a REIT, or a real estate investment trust, from a real estate company through a stock exchange platform. This type of investment allows investors to have a stake in a particular development by their chosen company. They can then receive dividend payouts and improved stock values over time, given that the REIT is growing.

This investment strategy has a low barrier to entry, making it a great way to truly passively invest in property. That said, many would liken this type of investment strategy to stock investing, so if you want to diversify and have a more active stake in the process, then it may be best to pair REIT investing with the aforementioned strategies.

4. Use Home Equity

You can also consider refinancing your existing property to access a larger pool of funds to fund future property acquisitions. This process is a great way to get new investments early on, even if you don’t have the immediate capital yet. 

This method is essentially a lending agreement with your existing property as collateral. So if you don’t have a good credit score, or if you don’t have a good cash flow system at this time, then it may be best to hold off on this strategy until your situation becomes less volatile.

5. Developing Property

Another way to make use of money from offset accounts is by developing or subdividing property. If you have a large plot of land in a prime area, you can consider splitting the property into separate lots. Then you can sell or develop those lots independently.

This is a common strategy for big development companies. And for investors who have scored with a good property, then even smaller-scale individuals can develop duplexes and townhouses and profit from them significantly. That said, you’ll need to acquire the right permits and get in touch with the right partners to ensure that the construction phase goes through without a hitch.

We hope we’ve thoroughly explained the various strategies you can consider when growing your property portfolio. All the best in making the most out of your property investments!