The path to buy investment property with equity

By Moye PM Team
Published in Property finance
November 04, 2021
4 min read
The path to buy investment property with equity

If you’re in the real estate market, you’re probably thinking about expanding your investment property portfolio. It’s a wise choice, especially if you already own a home, because it reduces your financing risk and allows you to obtain your next investment property with less cash up front.

You may have also come across the term “equity” and wondered how it relates to purchasing an investment property. The good news is that buying a home with equity is easier than you might think; all you need to know is how much of useful equity you currently hold.

Keep reading to learn how to use home equity to buy a rental property and all you need to know about purchasing property with equity if you’re ready to grow your investment portfolio and snag that next investment property.

What exactly is equity?

Let’s start with the fundamentals. In a word, equity is the difference between the value of your home and the amount you still owe on your mortgage. Still perplexed? Don’t worry; using a real-world example makes it much easier to comprehend equity.

Let’s pretend your existing home is worth $650,000 and you still owe $100,000 on your mortgage. In this case, your equity would be worth $550,000. (or, the difference between your property value and outstanding mortgage).

But, when it comes to purchasing an investment property, how does equity work? Simply put, equity can be utilised as a down payment on your next property, and this is just one of the many advantages of leveraging home equity to purchase a rental property.

Saving for a deposit is one of the most difficult aspects of acquiring a second (or third) rental home. As you may have guessed, equity can be a great tool for overcoming this while expanding your property investment portfolio.

Before we go into how to leverage equity to buy an investment property, make sure your current property has the necessary financing arrangement in place. You can start generating equity as soon as you start paying down your mortgage with a principal and interest loan (rather than an interest-only loan).

Soon enough, you’ll have enough useful equity to buy the next home in your investing portfolio!

What are the advantages of purchasing a home with equity?

Trying to figure out if buying a house with your own money is the best option can be difficult, especially if you’re unfamiliar with the process. However, we’re here to tell you that there are numerous benefits to purchasing a home with equity, including:

  1. It’s a low-risk investment strategy: using the equity in your first investment property to fund your next rental property is a low-risk strategy (as long as you’ve set up a buffer to meet any fluctuations in interest rates or a decline in rent).
  2. It eliminates the need for a large cash deposit: one of the most significant advantages of purchasing a property with equity is the elimination of the requirement for a large cash deposit. The benefits of equity compound as your property portfolio increases, allowing you to effortlessly grow your investments without having to save up the cash to support each purchase.
  3. It accelerates the growth of your property portfolio: in addition, eliminating the necessity for a cash investment helps you to expand your portfolio more quickly. This allows you to develop a well-balanced property portfolio in a fraction of the time it would take if you saved for each deposit with your primary source of income.

The advantages of using equity to purchase another property are evident. Because you’ll require less money up front, you’ll be able to make your next investment buy sooner than you would otherwise.

When purchasing an investment property, how does equity work?

It’s critical to grasp the distinction between equity and usable equity when considering how to use equity to purchase an investment property.

Unfortunately, most banks and lenders will not allow you to use all of the equity in your house when applying for a new loan. Lenders typically use a loan to value ratio (LVR) method to determine what proportion of your home’s equity is useable.

While each bank is distinct and each loan has its own set of terms and conditions, the majority of banks will lend up to 80% LVR on the value of your home (minus any debts you owe and fees like stamp duty).

Here’s a simple example of how to figure out how much equity you have in your home and how to use it to buy an investment property:

  • Let’s imagine your house is worth $650,000.
  • For this property, an 80% LVR would be $520,000.
  • However, you must also consider the $100,000 you still owe on your mortgage.
  • An LVR of 80% (minus your outstanding loans) equals $420,000 in usable equity.
  • If you’re willing to pay extra fees and penalties like Lenders Mortgage Insurance, you might be able to borrow more than 80%. (LMI). It all relies on your financial status and your investment goals and ambitions.

Remember to speak with a bank, lender, or mortgage broker to determine how much equity you can use to expand your real estate portfolio. Every bank is different, and other factors may influence the amount of equity you can use to expand your investment portfolio.

How to increase the equity in your property in order to expand your property portfolio?

Now that you know how to use equity to purchase an investment property, you should think about using this method to expand your portfolio. It makes sense, given how equity can help you develop a well-balanced portfolio more quickly than you could otherwise.

So, what can you do to increase your property’s equity?

  1. Increase the value of your home: by improving the market worth of your property through value-adding improvements, you can increase your equity and use it to fund your future property acquisition. Before you invest in any major repairs or remodels, make sure to evaluate which renovations would add the greatest value to your home.
  2. Reduce the amount you owe on your home: decreasing your debts (via offset accounts, for example) is another approach to increase your usable equity. This is making additional mortgage payments in order to reduce your debts and build equity for future investment purchases.

The main conclusion is that knowing how equity works and how to enhance your usable equity can help you build a well-balanced portfolio sooner rather than later. Additionally, there are simple steps you can take as an investor to raise your equity and expand your portfolio, lowering your risk and increasing your profits.

Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you. You should seek tax advice from your accountant, specific to your situation.


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Moye PM Team

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Table Of Contents

1
What exactly is equity?
2
What are the advantages of purchasing a home with equity?
3
When purchasing an investment property, how does equity work?
4
How to increase the equity in your property in order to expand your property portfolio?

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