How to use equity in your home to start your property investment portfolio
In this article we will explore how to calculate how much equity you currently have, and then I will present a scenario that will show you how you might be able to start your investment property portfolio sooner than you thought.
To discover the equity in your home, begin by estimating your home’s value. If you don’t know this, go to one of the popular real estate websites and search sold properties in your suburb - that will give you an idea of sales in your area, and a measure of what your property might be valued at.
Once you have ascertained a fair value, subtract the balance of your current home loan from the value of your property and you have your equity amount.
For example, if a property’s value is $500,000 and the home loan balance is $300,000 then the owner has $200,000 in equity from their home.
The exciting part of knowing that number is that all the hard work you have devoted to paying your home loan down may be able to be unlocked. A common scenario I have helped many investors with looks like this:
In the above example, the borrower has $200,000 in equity with their ‘Current Home’, but lenders will provide up to 80% of the home value less the remaining mortgage ($500,000 x 80% - $300,000) – which in this case is $100,000 (this is their useable equity).
After factoring in an extra 5% (estimate) for costs such as stamp duty, the ‘New Investment Property’ increases to $420,000, requiring a deposit of $100,000 (20% of total value).
So in this case the borrower is unlocking the equity in their home to borrow the full purchase price + all costs, and not putting any of their hard earned savings in to the investment purchase.
Also in the above example we have kept the Loan to Valuation Ratio (LVR) below 80% so there is no Lenders Mortgage Insurance (LMI).
There are aggressive strategies that mean you could get 2 investment properties with the same amount of equity by borrowing over the 80% and paying some LMI. This article, however, is just about presenting the idea that you could get an investment property from your hard work with your home.
Sitting down with experienced investment professionals is crucial to building a safe and secure property portfolio and corresponding finance structure that suits your family’s goals and needs.
Now you have seen an example of how a home owner can purchase an investment property without having to use their cash savings, you can consider what is possible for you and your family to attain financial security for your future.
