Can I buy an investment property using equity?

shutterstock_110278157Owning an investment property can be a great way to grow your wealth and to gain financial freedom. While most people think that buying this type of property is difficult, the great news is that you can actually acquire one using the equity that you have built in your existing property.

How Does Equity Build Up?

You build up equity as you pay off more of your debt and as your property’s value grows. So, for example if your mortgage on your home is $500,000 and you have a remaining balance of $260,000, it means that the property has equity worth $240,000.

Increasing your property’s value also helps increase its equity. You can do this by renovating your property. Keep in mind though that not all renovation projects add significant value to your property, so focus on those that do at the budget you can afford.

Understanding Usable Equity

When talking about equity, it is important to note that you will generally have access only to what’s called usable equity, which is often equivalent to 80 per cent of the total value of your property. Going back to our example earlier, if you have a property worth $500,000, you can utilise 80% of this value, this gives you a total loan pool available of $400,000, when you subtract your current home loan balance of $260,000 this leaves you with remaining usable equity of $140,000, which is still a good deal of money that you can access to start investing in property.

You may be able to use more than 80 per cent of your usable equity, but lenders will generally require you to pay the Lenders Mortgage Insurance (LMI). Your mortgage broker can help determine the amount of usable equity that you have to work with and also come up with a strategy to minimise the lenders mortgage insurance.

Maximising the Value of Your Equity

Now that you know what your usable equity is, it would also be a great idea to find ways to maximise it. Most investors would use all that equity as the deposit for a property that they wish to acquire. Keep in mind, however, that there are costs that you have to factor in aside from the deposit, including the stamp duty, application fees, and legal fees, just to name a few.

If you also wish to build your portfolio faster, you may choose to split your equity into two or several properties. Again, if you have usable equity worth $140,000, you could split it in half, giving you $70,000 to spend each on two properties.

If you would like to know more about using your equity to purchase an investment property, please give me a call on (08) 9581 5500 to book an appointment.

Written by Steve Milligan.