Using equity can be a powerful tool for investors to build wealth.
Many people think they don’t have the financial ability to purchase an investment property because they don’t have enough cash in the bank.
What these people don’t realise is that they can leverage their homes equity to help them purchase an investment.
In fact with banks tightening their investment lending criteria, using equity to invest is becoming one of the prevalent ways in which investors can still get into the market.
What is equity?
Your properties equity is calculated as the difference between the current mortgage owed and the properties market value.
For example if you had a property that was recently valued at $400,000 and you owed $300,000 then the equity you have is $100,000.
If you’ve owned your property for a few years there is a good chance that you would have some equity in it as property values rise over time.
It’s important to note that equity can be accessed in any property that you own not just the one you live in, therefore it’s important that you have the right strategy as your equity position becomes stronger as your property investment portfolio grows.
How to leverage equity to invest
Lets continue the example of the property that has $100,000 equity in it.
Jessica, the owner of this property is looking to purchase an investment priced at $350,000 which requires a 10% deposit ($35,000) up front. However she only has $10,000 in the bank. She earns a good wage and the bank is willing to give her a loan to service this $350,000 debt; however she is unsure how to come up with the funds to pay the deposit as the bank will only lend her 95% of the property value ($332,500).
Jessica meets with her broker who advises that if she has equity in her home she’s able to use this to make up the balance ($17,500 plus fees). The broker organises a valuation to be done on Jessica’s property which confirms she has $100,000 equity.
Jessica is then able to pull a portion of this equity out of her home in order to pay the deposit as well as covering her fees. She then able to go ahead with the 95% loan to service the remaining owed on her investment. This is a great outcome for her as she hasn’t even had to use the $10,000 cash in the bank. Which means she can keep it for emergencies!
Without over extending her personal finance Jessica has still been able to purchase an investment property to start building wealth for her future.
Using equity to build a portfolio
The strategy in the example above can be replicated as long as the investment properties that are purchased continue to grow or the debt is paid down in order to create equity. Investment property number one’s equity can be leveraged to purchase investment property number 2 and so on until a portfolio of investments is created.
Whether your strategy is to build a portfolio of multiple properties or to just get one, equity is a powerful tool that has been helping Australian investors get into the market for years. Contact us today to chat about using your equity to start building wealth for your future.